The new study "Monetary Policy and Rents" by Boaz Abramson (Columbia), Pablo De Llanos (Columbia), and Lu Han (University of Wisconsin-Madison) shows that since rents comprise 35% of the Consumer Price Index and represent the largest expense for renter households, rising rental costs could explain why aggressive rate hikes haven't crushed inflation as expected. This creates what economists call a "price puzzle," where the central bank's primary inflation-fighting tool actually increases prices in the largest component of the inflation index.
The research momentum: This isn't an isolated finding. A 2019 Federal Reserve study by Dias and Duarte first documented the counterintuitive rent increases, but the new Columbia/Wisconsin research provides the most comprehensive evidence to date with unprecedented data granularity and geographic coverage.
The big picture: This challenges decades of monetary policy orthodoxy from post-WWI rate hikes to Paul Volcker's 1980s inflation fight. Traditional Fed policy accepts that rate hikes will cause unemployment and financial hardship as a necessary cost of fighting inflation.
But both studies reveal a fundamental flaw: while rate hikes successfully reduce prices of food, transportation, and other goods, they simultaneously drive up shelter costs. The 2019 Federal Reserve research found this creates "strong opposing movements" where falling non-housing prices are offset by rising rents.
The new Columbia study goes further, showing that inflation measures excluding shelter actually respond more aggressively to rate hikes than overall CPI. This means the Fed may be causing economic pain while making its primary inflation target harder to achieve. The post-COVID rate cycle from near-zero to over 5% exemplifies this contradiction.
What the data shows
A 25 basis point increase in 30-year mortgage rates triggers:
1.7% increase in real rents within 12-24 months
1.4% jump in nominal rents over the same period
4-7% drop in home sales volume within 1-2 years
Stronger effects in single-family rentals (3.5% peak) versus apartments (3% peak)
The Methodology
Researchers built the most comprehensive rent tracking system to date, the ADH Repeat-Rent Index, analyzing:
30.3 million monthly observations across 6.5 million rental units
5,092 zip codes from 2011-2022, covering substantially more geography than Zillow's ZORI index
Quality-adjusted rent changes at the neighborhood level using repeat-sales methodology
Perfect correlation with nationally representative government data, proving the index captures true market dynamics
Vastly more granular coverage than the 2019 Federal Reserve study, which used national-level data
The mechanism explained
Higher borrowing costs lock out homebuyers: First-time buyers and owner-occupiers dramatically reduce purchases when rates rise, but must still find housing
Demand floods rental markets: Households unable to buy homes crowd into rentals, driving up competition and prices
Investors capitalize: Real estate investors maintain steady purchase activity, buying properties from cash-strapped owner-occupiers and converting them to higher-priced rentals
Homeownership rate drops: The economy settles into a new equilibrium with fewer homeowners and more expensive rentals
Go deeper on the housing market shift
Transaction patterns reveal the story: Using CoreLogic's universe of U.S. housing transactions, researchers found owner-occupier purchases plummet while investor activity stays flat during rate hikes.
Cash buyers vs. mortgage buyers: Investor purchases remain steady because they're less dependent on financing, while mortgage-dependent households get priced out.
Corporate buyers unaffected: Large-scale institutional investors show no response to rate changes, maintaining steady acquisition patterns.
Geographic patterns matter: The effect is strongest in markets where single-family homes compete directly with homeownership, explaining why apartment rents rise less dramatically.
Robustness testing validates findings:
Results hold across five different monetary policy shock measures from Fed research
Multiple alternative rent indices (Zillow ZORI, CPI-NTRR, ACY-MRI) show identical patterns
Effects consistent whether using federal funds rate, 2-year Treasury, or 30-year mortgage rates
Quarterly and monthly data produce the same conclusions
Findings align with 2019 Federal Reserve research using different methodologies, strengthening confidence in the results
The mortgage lock-in myth debunked
The researchers specifically tested whether mortgage lock-in drives rental demand increases. This theory gained prominence during recent rate hikes, suggesting that existing homeowners with low-rate mortgages (say, 3%) become reluctant to sell because they'd have to get new mortgages at much higher rates (6-7%).
The theory predicted that areas with more outstanding mortgages would see bigger rent increases, as more locked-in homeowners would reduce housing supply for sale, forcing more people into rentals.
What they found: The data shows no meaningful relationship between the share of homes with outstanding mortgages and rent increases following rate hikes. Areas where 80% of homes had mortgages saw similar rent patterns to areas where only 40% had mortgages.
Why this matters: The rental demand surge comes primarily from prospective first-time buyers and other potential homeowners being priced out of purchasing, not from existing homeowners staying put. This distinction is crucial because it means the rental market pressure is driven by new demand flows, not supply constraints from lock-in effects.
Distributional consequences: Lower-income households, who rent disproportionately, bear the brunt of monetary tightening. This creates an unintended regressive effect where anti-inflation policy hurts those least able to absorb higher costs.
What researchers found comparing their index to others:
Most granular coverage: Their index covers census tract level, while alternatives max out at zip code (ZORI) or metro area (CPI-Rent)
Broader geographic reach: Covers 1,000+ more zip codes than Zillow's index even in 2022
Longer time series: Available from 2011 vs. Zillow's 2015 start date
Higher correlation with official measures: 90%+ correlation with nationally representative CPI-NTRR
Bottomline
The mounting evidence suggests central bankers (and economists broadly) may need to fundamentally reconsider rate hikes as their primary tool, given that housing (the largest inflation component) works against them. This could explain why inflation has proven "sticky" despite aggressive Fed action.
The problem is compounded by the broader housing crisis. New home construction hit five-year lows in June 2025, with housing starts at just 1.32 million units annually. The U.S. faces a shortage of 3.7 to 5.5 million housing units according to various estimates from Freddie Mac and real estate groups.
Higher Fed rates worsen this dynamic by simultaneously suppressing new housing supply (making construction financing more expensive) while driving up rental demand (pricing out potential homebuyers). This creates a double squeeze that amplifies rent inflation precisely when the Fed is trying to cool prices.
Potential alternatives: The Federal Reserve may need to figure out how to directly affect housing markets and other supply-side financing programs rather than relying on broad monetary tightening. During the COVID crisis, the Fed took "unorthodox" methods like directly buying corporate bonds to backstop markets, and more of that same “unorthodox” thinking which includes targeted construction financing might be the best path forward.
We see great work by YIMBY (Yes In My Backyard) advocates fighting for zoning reform to increase density and streamline permitting. YIMBY reforms slow housing cost increases and reduce prices in many markets. These efforts have gained meaningful momentum, especially during California's 2024-2025 legislative session. We do need more YIMBY reforms. But without adequate financing mechanisms, even successful zoning changes are like a windmill without wind.
Housing supply constraints are addressed through both regulatory reform and cheaper financing for construction, monetary policy will continue to face this fundamental contradiction where fighting inflation actually drives up the largest component of the inflation index.
Brings up the question whether the inflation measure in the US should follow the European approach of completely excluding shelter from the measure.