Consumer Prices in May Show Annual Decline of 3.2%

Bureau of Labor Statistics has released the latest consumer prices data and the good news is that inflation has declined considerably from last year’s historic peak of 8.5%. The May-to-May price data for our region show an annual percentage change of only 3.2% and that suggests a more moderate maximum allowable annual rent increase for Beverly Hills rent-stabilized households starting in July. That is unless our councilmembers decide to allow landlords significantly greater than 3.2% so they can recoup rent increases delayed by the moratorium.

Background: Our Allowable Rent Increase is Indexed to Inflation

Like many rent-control cities Beverly Hills ties our allowed annual rent increase for rent-stabilized households to the rate of inflation. Each June city council looks at the May-to-May annual change in consumer prices for all goods and services purchased by urban consumers in our region and establishes the maximum allowable annual rent increase for Chapter 6 tenants at that percentage. That rent increase is available to landlords starting at the beginning of the fiscal year on July 1st. Practically speaking most landlords don’t raise the rent on July 1st as most will wait to know the new percentage before raising the rent. A minimum of 30 days notice to a tenant is required (35 days if it is mailed).

The precise percentage is determined by the Bureau of Labor Statistics releases which calculates the change in prices for goods and services on a monthly basis. The specific CPI index that rent control cities in our region look to is the Bureau’s CPI-U for Los Angeles-Long Beach-Anaheim. Beverly Hills uses the May-to-May (annual) change in prices pursuant to (section 4–6–3 of the rent stabilization ordinance. The allowable Chapter 5 rent increase is calculated differently but reflects the same annual change in consumer prices. For more detail see our explainer: Maximum Allowed Annual Rent Increase: What You Need to Know.

Inflation not only nibbles-away at our household budget; it has a direct effect on the rent that we pay because the percentage rent increase is tied to inflation. And a relatively-high rent increase is a gift that keeps on giving to landlords because it is compounded over time: each successive rent increase is a multiplier on the base rent plus preceding rent increases (much like compounded interest benefits savers).

Higher inflation after the pandemic threatened to displace households that could not afford the marginal additional cost of housing. We talked about that in our post: What Does Inflation Mean for Tenants? Thankfully inflation has since moderated.

Good News: Inflation is on the Decline

Relative to last summer inflation is down substantially. According to the Bureau’s price data, which was released just today, the May-to-May annual percentage change in consumer prices for all items purchased by urban consumers in our region is 3.2%. Just last month that figure was 3.8% and a year ago inflation broke records when the annual change in consumer prices was 8.6%. That was the highest in recent memory and about five times greater than the rate just a few years ago.

The moderating inflation means that rent-stabilized households may have dodged a bullet: we have been protected from the ravages of high inflation because city council last year established the maximum allowable annual rent increase at 3.1% for all households. That allowed the wave of inflation to break before council establishes the next percentage rent increase for the city’s fiscal year starting in July.

But the 3.1% rent increase allowed starting July 2022 was complicated business: it was available to landlords only for certain rent-stabilized households that escaped a rent increase before the moratorium put the freeze on rent increases. Clearly the 3.1% rent increase did not reflect the rate of inflation!

For more about why the first post-pandemic rent increase was limited to 3.1% read our post: Rent Can Rise Up to 3.1% for the 2019–20 Missed Rent Increase. For more about how that increase applied to tenants read the city’s FAQ.

Not So Good News: City Council May Allow a Rent Increase Greater Than Inflation

In normal times a low rate of inflation means a correspondingly low rent increase: the maximum allowable annual rent increase is indexed to the May-to-May change in consumer prices (CPI) and so a 3.2% annual change in prices should mean a 3.2% allowed increase for most tenants. (Chapter 5 tenants will pay a similar though slightly different percentage rent increase.) However this is not normal times.

City council could allow landlords a greater-than–3.2% rent increase in order to let them recoup ‘missed’ rent increases due to the moratorium freeze on rent increases. That was a pledge made when council “delayed” rent increases as early as March 2020 because, at the time, nobody had an idea how long the pandemic would last.

Now the specter of carrying-forward ‘missed’ rent increases at a time when some households are facing the repayment of pandemic-era rent debt is casting a shadow over the next rent increase. We will know more about council will approach the issue when the agenda is posted to the council meeting webpage on the Friday preceding the June 27th meeting.

To delay a rent increase meant landlords might lose only a few months of marginal additional rental income. But as the pandemic continued, council later reaffirmed the pledge rather than definitively turn the page on those missed rent increases as did other cities. We recommended turning the page: Our Take: Extend the Moratorium and Scratch the Lost Rent Increases.

Whatever Happens Higher Rents Are in Store

The Bureau of Labor Statistics surveys consumer prices on a monthly basis for a variety of goods and services and the monthly change in prices informs the consumer price index. The Bureau assigns the cost of housing outsize relative importance in the index because that cost is the typical household’s greatest expense.

For example federal data show that half of renting households in Beverly Hills pay more than 30% of their total household income in rent; three out of five of them pay 50% or more. To reflect the big bite that the cost of housing takes out of the household budget, the Bureau weighs that cost to be greater relative to any other household cost. Fully 34% of the CPI basket of goods and services is the cost of housing.

Consequently the rising cost of housing has a big and lasting effect on inflation. To a large extent that’s because the cost of housing tends to fluctuate less than volatile costs like food and energy. Economists call this ‘sticky inflation’: once the cost of housing rises it tends to stay elevated and thus exerts upward pressure on inflation over a longer period.

Even rent-control tenants will feel the effect of ‘sticky inflation’ because higher market rents contribute to a feedback loop: as inflation rises the maximum allowable annual rent increase which is indexed to CPI rises accordingly. That in turn puts upward pressure on the cost of housing which puts relatively greater upward pressure on inflation.

Renting households in Beverly Hills are somewhat less protected from inflationary pressure in housing than in some other rent-control cities for two reasons: the rent stabilization ordinance ordinarily allows a rent increase at the rate of inflation which is greater than what is allowed in Santa Monica and West Hollywood, for example; and our ordinance allows rents for most households to rise with inflation but not to decline below 3% even when inflation is zero. In other words the percentage rent increase can ratchet-up with inflationary pressure but is kept from fully ratcheting down at lower rates of inflation.

With that in mind we thought to look at the Bureau’s data to determine the annual change in the cost of rent compared to the overall rate of inflation (CPI) for our region. This chart shows how rents ordinarily rise at a greater annual rate than all consumer goods and services measured by CPI.

The pandemic is the anomaly: the cost of goods and services overall plunged almost into deflationary territory as the economy was shuttered. Unpredictability in the housing market led to a decrease in rents. However record-high inflation  anticipated the post-pandemic economic recovery and that was paralleled by a rise in rents that was almost as precipitous.

What is disturbing, though, is that rents in our region have continued to rise even as prices for other goods and services have moderated. That suggests future inflationary pressure due to the rising cost of housing — precisely the ‘sticky inflation’ that economists have warned about.

Take-Away

Beverly Hills rent-stabilized tenants may see a moderate rent increase this year in line with the rate of inflation (3.2%) or we may see a substantially greater rent increase if city council so chooses. But the bottom line is that in years ahead we are likely to see even stabilized rents climb more quickly than in neighboring cities.

It goes back to that feedback loop: rising market rents keep inflation higher than would otherwise be the case and that, in turn, keeps our maximum allowable annual rent increase higher than it should be because it is indexed to inflation. Cities that allow an annual rent increase below the rate of inflation as West Hollywood and Santa Monica do are able to put a brake on inflation as it affects rents and effectively squelch the feedback loop. That is a policy choice that we don’t seem able to make here in Beverly Hills.

Got a question about CPI and rent increases? Have a look at the additional resources below or Please get in touch with Renters Alliance!

Additional Resources

• Bureau of Labor Statistics CPI-U data for the Los Angles-Long Beach-Anaheim region.
• Our explainer: Maximum Allowed Annual Rent Increase: What You Need to Know.
• Another explainer: Fundamental Concept: the Maximum Allowed Annual Rent Increase.