Say goodbye to cheaper rent and airfares

It’s inevitable that the market dynamics that have delivered cheaper airfares, used cars and rents in the past year will eventually turn around. One high-profile reminder came from United Airlines’ earnings last week. The carrier cheered investors with its rosy earnings outlook, part of which came down to confidence that struggling low-cost rivals won’t bring back — and may keep cutting — unprofitable capacity, pushing up prices.

Rising airfares due to booming demand can be a sign that too much money is flowing through the economy, as was the case in 2021 and 2022. But airfares rising as carriers are scaling back flights suggests that businesses and households are feeling the effects of high borrowing costs in the wake of the Federal Reserve’s past policy tightening. Companies that had been competing on price after miscalculating post-pandemic consumption trends are slowly exhausting that approach, setting the stage for some rising prices over the next 12 months.

These increases aren’t the too-much-demand kind of inflation that roiled markets in 2022, but they will still be a pain point for consumers and require more nuanced thinking from the Fed.

As United Airlines Holdings Inc.’s management put it, Southwest Airlines Co. and other low-cost carriers have been struggling with poor profitability over the past year due to rising costs, excess capacity and, more recently, sluggish demand for air travel from budget-conscious fliers. Excess capacity was one reason airfares fell over the past 18 months after surging in 2021 and 2022. In mid-August, low-cost carriers finally accepted the need to repair their margins. Spirit Airlines Inc. and others are now cutting money-losing and less-profitable routes. September’s Consumer Price Index showed airfares rose on a year-over-year basis for the first time since March 2023.

United Airlines sees this as a positive inflection point for industrywide profitability over the next few years, and the performance of airline stocks since early August suggests that investors agree.

The used-vehicle market too looks ready for a reset after experiencing years of deflation. The number of secondhand vehicles for sale is lower this October than it’s been in any of the past three Octobers, according to Cox Automotive. The Manheim index for wholesale used-vehicle prices rose on a monthly basis in July, August and the first half of October, lifting off a three-year low reached in June. If the trend continues, it will take some pressure off the new vehicle market where prices have fallen 1.3% over the last year, according to the CPI report, and forced Stellantis NV, for example, to shed inventory to restore balance. Autos demand overall continues to be crimped by high financing costs.

The apartments market is also in the process of rebalancing. The South and West have seen an apartment glut this year, the result of a construction boom stemming from the pandemic era’s strong rent growth and low interest rates. While the currently oversupplied market is pushing down rents, new apartment construction has collapsed and the construction backlog is shrinking. As early as the second half next year, we could be looking at supply gluts turning into supply shortages in these markets, and rents rising again.

All three industries are displaying classic boom-bust dynamics — demand and pricing boomed in 2021 and 2022 during the post-pandemic low-rates period, production surged, followed by pricing and then profits coming under pressure. Now we’re seeing capacity, inventory and production declines in response to today’s economic environment as balance is restored.

Normally though, when industries like airlines, autos and residential construction are in a partial bust, interest rates have fallen significantly as part of a broader economic slowdown or recession. This then lowers the bar to ramp production back up. Today’s economy is very different: Solid economic numbers overall reflect an imbalance between sectors such as data center construction and artificial intelligence, which are immune to the rates cycle and booming, and industries and smaller businesses more sensitive to borrowing costs, which are struggling.

For the latter group, we’ll probably need to see a stronger rebound in demand and pricing to convince investors and management teams that this environment warrants investing in growth. But higher prices being the signal that companies are waiting for is the opposite of what the Fed wants to see at a time when they’re still not sure about the outlook for inflation. This bout of inflation though is different from what we had in 2022, and hopefully, if consumer prices start moving higher in 2025, the Fed will be wise enough to look through it.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Conor Sen is a Bloomberg Opinion columnist. He is founder of Peachtree Creek Investments.