Rent is the new gas. Surging rent prices–instead of gas – are now hitting consumers hard, according to data from Bank of America Institute.
Median rent payments for Bank of America customers increased by 7.4% year over year in July, a slight pickup from 7.2% in June. Increases were seen across all income groups, but middle income and younger Americans saw the largest increases, the report said.
“With roughly 34% of U.S. households being renters, a sizeable increase in rental prices have squeezed consumer wallets,” the institute said.
Card spending per household, which measures the spending activity of an average Bank of America customer household, increased by 5.3% year over year in July, down from 5.7% in June, it said.
But with the consumer price index showing inflation at 9.1%, a more than 40-year high, in June, it noted that inflation-adjusted, or “real,” consumer spending “continues to be under pressure.”
Who’s facing the largest rent increases?
For consumers with annual household income between $51,000 and $100,000, median rent payment soared by 8.3% year over year in July, while the lowest income group of $50,000 and less saw a 7.4% increase, the data showed. Those making more than $251,000 annually saw the smallest year-over-year increase (5.9%).
Generationally, Gen Z (or those born after 1996) suffered the largest 16% jump in median rent payment in July from last year, while Baby Boomers (born between 1946 and 1964) only saw a 3% increase, the data showed.
Why are rents rising and when will they stop?
Rents aren’t likely to stop rising any time soon.
June’s CPI report showed rent increased from a year ago by 5.8%, the fastest pace since 1986, and upward pressure is expected to continue. Comprising about a third of the CPI weighting, rent inflation will likely keep CPI inflated this year.
Goldman Sachs forecasts rents to increase by 0.6% to 0.7% from month to month for the next several months and peak around 7% year-over-year later this year.
Reasons for rising rents include high demand as home buyers get priced out amid rising interest rates, home prices, and low inventory; landlords making up for lost rent during the pandemic-related rent moratorium; and higher maintenance costs as inflation jumps, analysts have said.
July’s CPI report is due Wednesday. Economists expect headline inflation to ease to 8.7% from June with help from lower gas and oil prices. However, they expect the core rate which includes price changes for everything except food and energy to rise to 6.1% from 5.9% in June.
How does this affect consumer spending?
Consumer spending has been moderating since the beginning of the year, partly due to the squeeze from rent increases, “but July was not as bad as many had feared,” Anna Zhou, economist at the Institute, said.
Lower gas prices in July freed money to be spent elsewhere, while healthy savings built up during the pandemic provided consumers a cushion. People used some extra money to purchase goods at retail events, including Amazon’s Prime Day, and leisure services like airlines, lodging, entertainment, and restaurants, data showed.
Even so, significant rent increases still have time to hit household finances, particularly for middle- and lower-income renters.
“It is likely that rent payments will remain high, creating sustained downward pressure for the consumer,” Zhou said.
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at [email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.