Rents a Key Driver of Inflation

Like an uninvited drunken uncle, higher consumer inflation crashed the economy’s growth party Wednesday. But it wasn’t just higher energy prices that caused concern.

Rising rents and higher prices for a wide variety of consumer goods, including prescription drugs, swimsuits and school books, were key factors behind a higher-than-expected 0.6% increase in consumer prices in April.

The inflation news, reported by the Labor Department, sparked a stock market sell-off amid fears that it would lead to higher interest rates and an economic slowdown.

Higher rents in particular were worrisome, accounting for nearly half the surprisingly high 0.3% increase in the core consumer price index, which excludes energy and food costs. Rents have been increasing as many people are priced out of the sky-high home purchase market.

Scott Sanders was among many Southland residents facing soaring rents. He was paying $1,550 in monthly rent for a two-bedroom apartment in a trendy West Los Angeles neighborhood near the Grove shopping center. But it was too good to last.

One by one, the building’s apartments were getting face-lifts -- followed by substantial rent increases. Sanders figured his rent would nearly double when the renovation effort got to his door. So he got out.

“I could see the writing on the wall,” said Sanders, a liquor license consultant who is now renting part of a large home from a friend.

“It was either move now or move later.”

Many of these rent increases and other higher prices could stick around because they aren’t dependent on energy and don’t necessarily respond to Federal Reserve interest rate hikes, economists said.

The spread of price hikes to nonenergy areas “suggests that inflation is now a greater risk for the economy,” said Lynn Reaser, an economist for Bank of America in Boston.

“It’s still moderate,” she said. “But this report does suggest that if the economy moves closer to full capacity, with the unemployment rate at 4.7%, this could be the beginning, perhaps, of a little more hint of a pickup in inflation.”

It also was another sign that the economy is shifting gears, perhaps into a phase where growth slows and inflation rises simultaneously, said Mark Zandi, chief economist for Moody’s Economy.com.

“We’ve enjoyed an economy that’s been expanding very strongly,” he said. “The next couple of years aren’t going to feel nearly as good as the last couple.”

The 0.6% rise in the consumer price index in April surpassed the 0.5% pace expected by economists. Consumer prices so far this year are up at an annual rate of 5.1%, much higher than the 3.4% posted for all of last year.

The 0.3% boost in core consumer prices exceeded the 0.2% expected by analysts. Core prices are up 3% so far this year, versus 2.2% last year.

There were signs that higher energy costs were getting passed through to consumers. Transportation prices rose 2.4% in April, with airline fares rising 1.6%, the largest increase since July, partly because of fuel-related surcharges.

Continental Airlines Inc. on Wednesday said it was raising fares by $2.

Hospital and other related services rose 0.8%, the most in two months. Clothing prices climbed 0.6%. Education costs, including tuition and books, increased 0.5%.

On the positive side, food prices were flat and computer prices declined 2.6%.

The biggest component of the core consumer price run-up last month came from rent increases. Directly and indirectly, rent accounts for about 40% of the core consumer price index.

Apartment construction has dried up as land prices rise and landlords convert apartments into condominiums. The conversions forced renters to look for another apartment, further adding to the squeeze.

“As a result, rents are rising,” said Mark Vitner, a senior economist with Wachovia Corp. “And that is likely to be with us for a long time.”

Perhaps nowhere is the trend more evident than in Los Angeles. Rents rose 7% last year -- more than double the rate of increase of recent years -- as the occupancy rate soared to a historical high of 97%, according to the Casden Forecast at USC’s Lusk Center for Real Estate.

The going monthly rent for a two-bedroom apartment in Hollywood is $1,900. In West Los Angeles, the most expensive rental market in California outside San Francisco, the average two-bedroom goes for $2,460, according to the forecast.

“There is real pressure to rent now because people can’t afford to buy,” said Delores Conway, director of the Casden Forecast.

Rising mortgage rates also are giving landlords more incentive to boost rents. When rates were low, Southern California landlords were afraid to raise rents because mortgage payments were comparable to rent costs, said James Joseph, a Century 21 brokerage owner who specializes in the apartment market.

“That timidity is disappearing,” Joseph said.