The Pass-through of Gaps between Market Rent and the Price of Shelter 
Shelter is the largest component of the Consumer Price Index (CPI), comprising 36.2 percent as of February 2024. Consequently, the price of shelter can play a crucial role in driving inflation dynamics and in informing central bank decisions. Several studies demonstrate that the price of shelter as measured in the CPI (CPI shelter) tends to lag market rent because market rent reflects only the rents paid by new tenants, whereas CPI shelter captures rents paid by new and existing tenants. This paper refers to the difference between market rent and CPI shelter (relative to the baseline) as the “market–shelter gap.” It uses data at the metropolitan statistical area (MSA) level to examine the longer-term dynamics of market rent and CPI shelter. More specifically, it studies the pass-through of the market–shelter gap into CPI shelter to determine whether (1) market-shelter gaps return to zero without further shocks, (2) how quickly market-shelter gaps close, and (3) whether market-shelter gaps close as a result of changes in CPI-shelter growth or due to changes in market-rent growth.
Key Findings
- Market–shelter gaps do converge toward zero in the long term.
- The convergence is nearly complete after about five years. After four and six years, gaps have closed 81 percent and 88 percent, respectively. Regarding the short term, gaps close only 3.5, 8.4, and 25 percent in the first month, three months, and 12 months, respectively.
- Higher (lower) CPI-shelter growth and lower (higher) market-rent growth each explain about half of the closure of a positive (negative) market-shelter gap. After six years, changes in CPI shelter growth close 43 percent of a gap, while changes in market rent growth close 45 percent of the gap.
Implications
In December 2023, the market–shelter gap was 6.6 percent larger than it was in December 2019. This paper estimates that based on the size of the gap, CPI shelter will grow 1.03 and 0.82 percentage points more in 2024 and 2025 than if there were no gap, respectively. Because shelter makes up 45.5 percent of core (excluding food and energy prices) CPI (as of February 2024), this estimate implies that core CPI will grow an additional 0.47 and 0.37 percentage point in 2024 and 2025, respectively.
Abstract
The gap between market rent and the price of shelter was 6.6 percent larger in December 2023 relative to December 2019. Because shelter prices comprise 36 percent of the Consumer Price Index and therefore influence monetary policy decisions, it is vital to understand the pass-through of this difference, or “market-shelter gap.” I use MSA-level variation to answer this question. When there is a positive market–shelter gap, the price of shelter grows faster and market rent grows slower until the gap closes, which takes about five years. Faster shelter-price growth and slower market-rent growth each explain about half of the convergence.