Today’s Consumer Price Index Change: Tomorrow’s Residential Rents

The consumer price index (CPI) for Los Angeles rose 3.2% from December 2017 to December 2018. The most recent CPI data shows San Diego’s CPI rose by 3.3% and San Francisco’s CPI rose 4.5% over the previous year. For perspective, 2% annual inflation is a rate sufficiently neutral to ward off deflation and induce consumer spending. In turn, spending keeps employment at optimum levels to support demand for housing.

California’s healthy CPI growth is complicated by high demand for rentals and overly restrictive zoning on new multi-family construction. Slow growth in new construction and wages lagging behind home price and rent increases are part of why Los Angeles residents spend so much of their income on rent.

The 3.2% rise in Los Angeles portends a parallel rise in rents over the next year or two. Rents tend to hold tight in their increases to CPI movement and personal income levels, while asset prices (homes and securities) are driven by wealth levels of personal cash reserves and the ability to borrow. Still, home prices are anchored over the long term to inflation, a fact reflected in the mean price trendline for real estate. Therefore, the rapid price increases seen in California from 2012-2018 are unsustained by incomes, and thus need to fall back in the coming years.