Phoenix is making significant strides in its battle against inflation, outpacing most other cities in the United States. Recent developments in the housing market illustrate a key point that economists and the Federal Reserve have emphasized for months: when rents decrease, overall inflation often follows suit.

Consumer prices in Phoenix increased by 2.6% from April 2023 to the previous month, a slower rate than the 3.4% national average and lower than any other metro area tracked by the Bureau of Labor Statistics (BLS). Inflation in Phoenix has remained below 3% since October of last year, dipping to 2.2% in February, which is just above the Federal Reserve’s target level of 2% for the country.

This economic slowdown is noteworthy in Phoenix, the fifth-most populous city in the nation, especially with a presidential election approaching. Maricopa County, where Phoenix is located, played a crucial role in the 2020 election, and its economic conditions are closely monitored by political strategists, economists, and central bankers.

Federal Reserve Bank of Chicago President Austan Goolsbee highlighted the importance of housing inflation as a critical indicator for the immediate future. In Phoenix, both rents and home sales have cooled over the past year, contributing to the overall decrease in inflation.

Median home sale prices in Phoenix rose by 5.1% from April 2023 to the previous month, reaching an average of $450,000, according to Redfin. However, this increase occurred amid slower sales, with nearly 3% fewer homes sold than in the previous year. Additionally, more home sellers are lowering their asking prices, with reductions seen in over 31% of Phoenix homes in March, compared to the national average of nearly 18%.

Mark Stapp, a real estate professor at Arizona State University’s W.P. Carey School of Business, believes Phoenix is past the worst of its housing crunch. He anticipates that rent and home price trends will return to more normal levels.

Sheryl Bowden, president of Realty Executives in Phoenix, noted a significant slowdown in the homebuying market, with realtors reporting a dramatic decrease in showings at a recent industry event. This cooldown is attributed to fewer people moving to Phoenix and an increase in residential construction, which has eased rent inflation.

Phoenix's population growth has declined from an annual rate of 1.6% in 2019 to just 0.4% by 2023, according to a recent census analysis. At the same time, the city has seen a surge in rental inventory, with many projects conceived before and during the pandemic finally being completed. Brent Moser, a principal at Lee & Associates, reported that some apartment complexes have vacancy rates as high as 11%, well above the healthy market rate of roughly 6%. He predicts rent declines of 2% to 4% over the next year or year and a half.

Despite this progress, Arizona still faces significant housing affordability issues, with a shortage of about 270,000 units and only 26 rentals available for every 100 extremely low-income households, according to Arizona State University researchers. Nevertheless, the progress in Phoenix has led to a decrease in median rent, which fell by 7% to $1,300 for a one-bedroom apartment in April, compared to a national decline of just 0.6%.

The decline in rents has impacted the overall "shelter" index, which the BLS uses to measure housing costs. This index rose by an annual rate of 3.5% in Phoenix in April, slower than the national increase of 5.5%. Shelter costs account for about 36% of the Consumer Price Index (CPI), a critical federal inflation gauge.

Rental rates have a significant impact on how inflation is measured. Falling rental prices typically lead to lower shelter costs and overall CPI inflation. In other cities with lower local inflation rates, such as Houston and Anchorage, Alaska, slower shelter costs have also been a key factor.

While the Federal Reserve can influence demand by raising interest rates, which indirectly affect mortgage rates, it cannot build more houses or apartments. The Fed relies on housing data, which often provides a delayed snapshot, to inform its rate decisions. Fed Chair Jerome Powell acknowledged the lag structures in the inflation process, particularly in housing, which can delay the effects of rent slowdowns on the national data.

In summary, Phoenix's experience underscores the critical role of housing costs in managing inflation. As rents decline, overall inflation tends to follow, offering a glimpse into the potential for broader economic stability. This progress in Phoenix could serve as a model for other cities grappling with similar inflation challenges, emphasizing the importance of housing market dynamics in shaping economic outcomes.

Moreover, the developments in Phoenix highlight the intricate connections between local real estate trends and broader economic indicators. As cities across the nation strive to manage inflation and stabilize their economies, the case of Phoenix provides valuable insights into effective strategies and potential pitfalls. By focusing on the housing market and understanding its impact on overall inflation, policymakers and economic planners can better navigate the complexities of economic management in today's challenging environment.