Penn State/ACY Inflation Index suggests inflation rate has stabilized

UNIVERSITY PARK, Pa. — The August 2020 release of the Penn State/ACY Alternative Inflation Index indicates that the United States annual inflation rate stabilized in the second quarter with an annual rate of .0.90% for June 2020, up slightly from the May rate of 0.86%.

The small uptick indicates that overall inflation in the U.S. remains low following the general decline in inflation that began in March 2020. It also reflects a general downward trend in rental inflation. For June 2020, the Penn State/ACY Marginal Rent inflation rate was 2.98%, down from the May rate of 4.55%.  To put this in perspective, the June 2019 Penn State/ACY Marginal Rent inflation rate was 5.53%.

The Penn State/ACY Alternative Inflation Index is constructed by replacing the rental price of both tenant- and owner-occupied housing with a new measure, Marginal Rent Index (MRI), which was introduced by researchers Brent Ambrose, Edward Coulson, and Jiro Yoshida in 2018. The Penn State/ACY Index has been released to the public each month since its introduction in July 2018.

The Penn State/ACY Core Personal Consumption Expenditure (PCE)  Inflation Rate for June also declined from 1.26% to 0.93%, well below the Federal Reserve’s 2% target rate. In comparison, the Bureau of Labor Statistics (BLS) also reported that the June year-over-year change in the BLS Core Consumer Price Index declined to 1.19% and the Bureau of Economic Analysis (BEA) Core PCE inflation rate stood at 0.95%.

By looking at the monthly percentage change in the Marginal Rent series rather than the traditional year-over-year percentage change, the Penn State/ACY Marginal Rent series shows a rapid weakening in average rental rates across the U.S. In June, the monthly percentage change was negative 0.9%. In comparison, the percentage change was a positive 0.03% in May and 0.31% in March. As the Penn State/ACY Marginal Rent index is based on landlords’ net operating income, this first monthly drop since August 2007 suggests the market is experiencing declines in tenant rent payments. Thus, the June marginal rent index foreshadows a potential looming eviction crisis in the coming months.

“The observed differences in the overall inflation rates and the marginal rent rates reflect the continued uncertainties caused by the COVID-19 pandemic. The stabilization of inflation from May to June reflects the reopening of much of the economy in late spring and the accompanying surge in economic activity,” said Ambrose, who is Jason and Julie Borrelli Faculty Chair in Real Estate and director of the Institute for Real Estate Studies at Penn State Smeal.

Yoshida elaborated on Ambrose’s observation.

“However, we do not see evidence that government economic stimulus programs have created inflation pressure. The downward trend in the Penn State/ACY Marginal Rent series reflects declines in multifamily transaction volume and falling rent collections. Furthermore, significant uncertainty continues to surround the direction of future rental rates as government policies designed to protect households from evictions and mortgage foreclosures are set to expire later this summer,” said Yoshida, who is associate professor of business in the Smeal College of Business. 

Based on Ambrose, Coulson and Yoshida (2018), the rental inflation rate reported by the ACY Marginal Rent Index is much higher and more volatile than the BLS CPI Rent Index.

The Penn State/ACY Alternative Inflation Index is the result of collaboration among three researchers: Ambrose, Yoshida, and Coulson, who is professor of economics and director of the Center for Real Estate at the University of California Irvine’s Paul Merage School of Business.

Last Updated August 07, 2020