Rent is a term that defines the payment for a shelter given from one individual to another. Like any economic 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 rent for a given period due to inflation. CPI and rent have a direct connection because most economists include payments for shelter as part of the basket of goods that make up the CPI calculation. When rent prices rise too high due to inflation, consumers can experience lower purchasing power for other goods, both essential and nonessential.
CPI and rent can also affect other payments for shelter, namely for payments made when a consumer purchases a home. 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 — may also be in the overall economic formula. Economists, however, typically separate out rent when computing CPI. Separating rent from payments for home purchases is also necessary at times to further analyze the effect of CPI and rent payments.
Inflation may be a naturally occurring phenomenon in terms of shelter payments. When the sales prices for houses increase dramatically, for example, it may be cheaper to rent a home initially. As demand continues to grow for rental properties, however, the prices may experience a slightly upward tick. Additionally, more individuals needing homes — such as first-year college students or newly married couples — can also increase demand and, thus, the associated rent payments. Hence, a direct — but natural — connection between CPI and rent exists in the market for these two items.
Shelter is one of the most important items an individual or family needs to survive. Economists therefore include payments for shelter in the basket of goods for computing CPI. The numbers that come from the computation 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 is unable to dictate prices based solely on supply and demand. CPI and rent computations can lead to welfare policies that aim to help the poorer citizens find and pay for adequate housing.
CPI and rent computations are often a quarterly activity. This allows a nation to quickly ascertain the amount of inflation in a market and the effects it has on shelter payments. Rent payments that rise due to inflation mean consumers have less money to spend on other goods. This can throw an economy into a contraction period if the economy depends heavily on consumer spending for economic growth.