Rent payments are subject to inflation, which can reduce purchasing power for other goods. The Consumer Price Index (CPI) measures the change in income due to inflation and includes housing payments. CPI and rent affect other housing payments, and government intervention may be necessary to help the poorest citizens find adequate housing.
Rent is a term that defines the payment for a given shelter from one individual to another. Like any financial payment, rent can be subject to inflation, the phenomenon described as too many dollars chasing too few goods. The Consumer Price Index (CPI) measures the change in income over a given period due to inflation. The CPI and rent have a direct connection because most economists include housing payments as part of the basket of goods that make up the CPI calculation. When rental prices rise too high due to inflation, consumers may experience reduced purchasing power for other goods, both essential and non-essential.
The CPI and rent can also affect other housing payments, that is, the payments made when a consumer buys a house. The CPI calculation may also include other costs associated with housing or shelter payments. For example, payments made for furniture or utilities, such as heating oil or water, can also be in the general economic formula. However, economists often separate out income when calculating the CPI. Sometimes it is also necessary to separate the rent from the payments for the purchase of a house to further analyze the effect of the CPI and the rent payments.
Inflation can be a natural phenomenon in terms of housing payments. When home sales prices rise dramatically, for example, it may be cheaper to rent a home up front. However, as demand continues to grow for rental properties, prices may experience a slightly higher markup. Additionally, more people in need of homes, such as college freshmen or newlywed couples, may also increase demand and therefore associated rental payments. Therefore, there is a direct, but natural, connection between the CPI and the market rent for these two items.
Shelter is one of the most important items that a person or family needs to survive. Economists therefore include shelter payments in the basket of goods to calculate the CPI. The numbers that come from the calculation can help a nation decide if government intervention is necessary. This type of social economic policy is the result of a mixed economy; that is, the free market economy cannot dictate prices based solely on supply and demand. CPI and rent calculations can lead to welfare policies that aim to help the poorest citizens find and pay for adequate housing.
CPI and income calculations are often a quarterly activity. This allows a nation to quickly determine the amount of inflation in a market and the effects it has on housing payments. Rent payments that increase due to inflation mean that consumers have less money to spend on other goods. This can lead an economy into a contractionary period if the economy is highly dependent on consumer spending for economic growth.
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