What happened:

The Bureau of Labor Statistics released their March estimates for the Consumer Price Index today, and the headline numbers were a surprise. The annual growth rates in both core CPI and the headliner including food and energy fell much closer to target, 2.8% and 2.5% respectively.

Surprisingly the annual growth in overall shelter component of CPI also fell, now 2.7%, despite both of it’s largest components (owner’s equivalent rent and rent for primary residences) swinging up in March. The discrepancy is driven by lodging at hotel/motel. 3.2% of Shelter, lodging was down 4.3% over March – the largest fall since April 2020. Insurance (1.2% of Shelter) was down only slightly.

Owner’s equivalent rent in particular popped above our expected forecast. Volatile over the past few years, March’s annualized monthly growth rate hit 4.9%, over 1.5 percentage points above our forecast. Monthly growth of rent for primary residences also increased rather than declined, though less significantly. Hitting 4.1% annualized growth, the actuals are 1 percentage point over forecast.

Why it matters:

Close attention will be paid to inflation reading over the coming months as trade wars and bond yield fluctuations cause more households to be concerned over what the future may bring to their budgets. Shelter is roughly a third of a household’s expenses in an ideal situation. After a significant shock to rent over the pandemic in many markets, more and more renters are forced to spending a larger share of their income on rent, and so continue to hope for rent pressure to come down.

What our forecast says:

Relative unchanged from last month’s estimates, we forecast March seasonally adjusted owner’s equivalent rent growth to continue to slow to 3.47% annualize growth. Similarly, seasonally adjusted rent for  primary residences is expected to slow to 3.10% annualized growth. In fact, Zillow’s CPI shelter release forecast for the next six months was relatively unchanged, however full market rent captured by the CPI measures is now expected to soften more aggressively towards the end of 2025 into the next.

Our results use a modeled relationship between Zillow’s Observed Rent Index, capturing on-market asking rent for new leases, and the shelter components of the Consumer Price Index (CPI), which seeks to capture the market for both new and renewed leases. This modeled relationship incorporates expected rent growth in on-market rents (Zillow’s Observed Rent Forecast, ZORF), assumptions over how current landlords respond to higher on-market rent when keeping or raising current rent on a lease renewal, and mobility rates of renters – which determines the share of the population experiencing higher rents since the significant on-market rent shock in 2021 and 2022.