Inflation is hitting millions of Americans where it hurts….their wallets. But some Gen Zers and millennials aren’t experiencing the same pain. In fact, recent data suggests that younger generations are avoiding the worst of recent price increases, and their personal inflation rate is lower than others.
Let’s dive into the data to find out why these younger generations aren’t seeing the inflation impact as badly as others, and how that can impact their spending power in the coming years.
Why Gen Z Is Seeing Lower Inflation Than Everyone Else
It’s because most of them are renters.
Recent inflation data from the Bureau of Labor Statistics combined with housing data from Redfin shows that the overall inflation costs to younger generations are lower than inflation hitting everyone else. Specifically, Gen Z renters who signed a new lease in December 2022 only saw a 5.6% increase in overall costs, compared to 6.5% for the rest of America.
A huge piece of this puzzle is that rent prices are finally cooling off, while older generations that recently bought a home were purchasing at all-time high prices. Gen Z renters were able to sign new leases at the end of 2022, which included much lower price increases than housing costs for homeowners.
Gen Z homeowners may not see the savings, as housing inflation typically lags rental prices by 12 to 16 months when looking at the Case-Shiller Home Price Index.
Does This Give Gen Z and Millennials More Spending Power?
While inflation is still much higher than the Federal Reserve’s 2% target, the fact that the rental price growth has slowed gives renters a bit more choice and flexibility in their living situation. As interest rates slow the economy, the demand for rentals is slowing with it, and landlords are forced to compete.
According to Redfin senior economist Sheharyar Bokhari, “People looking to move now may also want to take advantage of declining demand and negotiate with landlords about perks like free parking or a free month’s rent-and those who are staying put may have some bargaining power when renewing their lease.”
And with shelter typically accounting for a large part of most Americans’ monthly expenses, this can have a significant impact on the monthly budget of younger generations.
Inflation Used To Hit Gen Z and Millennials the Hardest
Before recently, both Gen Z and millennials were seeing record-high levels of inflation for their generations, mostly due to (again) rental prices. With inflation surging for the better part of 2021 and all of 2022, housing inflation was in the double digits.
The most recent census data reveals that less than 40% of Americans ages 35 and younger own a home, while those in Gen X and baby boomers have homeownership rates of over 60% and 70%, respectively. Locking in a mortgage and house price before inflation hit hard kept overall inflation rates a bit lower for the older generations.
But now that the rental market is cooling off (and even dropping in some markets), this is giving relief to younger renters. In fact, this is the first time since 2020 that inflation is lower for Gen Z and millennials than older generations.
But, the Data Is a Bit Misleading
While this lower inflation rate is good news for Gen Z and millennial renters, it is a bit misleading.
You see, while it looks like homeowners are paying more due to a higher inflation rate, CPI data doesn’t actually count the mortgage costs of homeowners.
Instead, it calculates what is called the “owners’ equivalent rent,” or the price a homeowner would pay if they rented their own home at a fair market price. And while this can be a helpful estimate for the overall shelter costs of homeowners, it doesn’t take into account actual costs.
For example; if someone bought a home in 2020 with a 3% mortgage interest rate, their housing costs would be fixed (outside of rising insurance and tax rates). If the house doubles in value along with the equivalent “owners’ equivalent rent,” then it can look like homeowners are getting hit with high inflation.
But the truth is that owning a home created a fixed cost in the past when the dollar had more purchasing power. So it creates a false picture of how inflation is actually impacting homeowners. Unless you recently entered the housing market, you are still probably experiencing less “shelter inflation” than renters are…unless renters are paying less than they were before.
While Gen Z and millennial renters are finally seeing some reprieve in the costly rental market, it comes after a period of massive rent price increases and double-digit inflation for their generations. The best scenario would be to find a lower-cost rental and lower their overall fixed shelter costs. But while CPI is showing that homeowners are being hit the hardest, the data isn’t entirely accurate. Overall, it seems that the Fed’s interest rate policy is doing its job to slow inflation, but there’s still a long way to go for all generations.
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