Terrell McCallum, a private equity advisor in Dallas, spends a lot of time thinking about markets and interest rates. He knows that the Federal Reserve is targeting an average of 2% annual price increases, so it was a shock to learn that his rent would rise as much as 10% this year.

“I can afford it, but it’s getting to the edge of the financial burden,” said McCallum, 33. He and his wife have been saving for their first home, but now that they’re paying $1,830 for their apartment and expenses, it’s going to be harder turn into. He tried to reduce the increase, but the company he rents from didn’t budge.

“They said, ‘This is what the market is doing.'”

McCallum’s experience reverberates across America as rents skyrocket after a brief pandemic slump, taxing households and fueling overall inflation. That’s bad news for the Federal Reserve, as it could make the current uncomfortably rapid price hikes last longer. It’s also problematic for the White House, as it hits households in their pockets, diminishes well-being and makes voters unhappy.

The rise in rents was the result of a frenzy in the owner-occupied housing market. People tried to buy when the pandemic broke out in the United States, often looking for extra space, only to find that houses were in short supply after years of underbuilding after the housing crisis. That lack of properties has been exacerbated by work stoppages, supply shortages and labor restrictions during the coronavirus era, all of which have prevented developers from ramping up production to meet demand.

When buyers quoted the prices of single-family homes and condominiums, many people who would otherwise have moved into home ownership found themselves unable to afford it, increasing demand for apartments and leases. Rents have risen further due to the large number of people seeking places with more space and home offices during the pandemic, and because millennials in their late 20s and early to mid-30s are looking for more autonomy.

“People may want to move on their own after being stuck with roommates during the pandemic,” said Adam Ozimek, chief economist at Upwork, an online freelance marketplace. “It is also possible that remote working plays a role here.”

Government incentives and expanded unemployment benefits also helped people accumulate savings during the pandemic so they could afford to move. Personal savings as a share of disposable income rose during the crisis, and while the share has fallen to normal levels, it remains slightly elevated at 9.4%, compared to about 8% just before the pandemic.

The combination of factors seems to have created a perfect storm that pushed the consumer price rental index up 0.5% between August and September, the fastest pace in about 20 years.

That’s a concern for the Fed, because house prices tend to move slowly and once they rise, they usually continue to rise for a while. Rental data is also factored into what’s called “equivalent owner’s rent” — which attempts to put a price on how much owners would pay for housing if they hadn’t bought a home. Together, housing measures make up about a third of the total consumer price index.

General consumer prices rose sharply in 2021 and rose 5.4% in September compared to the previous year. Fed officials are hoping and betting the move is temporary, but they are closely monitoring housing measures as a risk to that outlook.

“Many participants pointed out that the owners’ equivalent rent component in price indices should be carefully monitored, as rising house prices could put upward pressure on rents,” notes from the Fed’s September meeting, released Wednesday, said.

Rent is less critical to the inflation gauge the Fed prefers, the one it officially pursues when it targets 2% inflation per year on average, than to the CPI. But it’s a big part of people’s experience with pricing, so it could help shape their expectations about future cost increases.

Those expectations are very important to the Fed. As consumers anticipate faster inflation, they may demand higher wages to cover their rising costs. If companies raise prices to cover rising costs, they can cause an upward spiral. Some key measures of the inflation outlook – most notably the New York Fed’s Survey of Consumer Expectations – have already moved higher.

The Fed is already preparing to slow down the major bond purchases it made during the pandemic to keep longer-term interest rates low and keep money flowing around the economy. If inflation remains high, the Fed could also come under pressure to raise its key rate, its more traditional and powerful instrument. That could slow mortgage lending, cool the housing market and push inflation down.

But that would come at a high cost and slow down the labor market when there are 5 million fewer jobs than before the pandemic. So for now, Fed officials are putting themselves in a position where they can be nimble without signaling that they are ready to hike rates.

White House officials are also grappling with their options to ease pressure on home prices. President Biden’s economic agenda includes measures that would build more homes and discourage zoning laws that would keep new construction at bay.

Such an intervention would take time – houses are not built overnight. And in the meantime, rents will almost certainly continue to rise in inflation data, which reflects rising housing costs with a long lag. More up-to-date measures of rent pressures produced by Apartment List and Zillow have shown costs have risen in recent months, although many measures on rent and new leases have calmed down somewhat after a scorching hot summer.

The national median rent is up 16.4% since January, Apartment List said in its September rent report, with monthly growth slowing slightly from its July peak.

“This is still very strong by historical standards – we are in the low season,” said Igor Popov, chief economist at Apartment List. “It’s a race car that slows down for a corner, but it’s still going faster than we’ve ever done in our lives.”

Whether rent growth accelerates or slows next year may depend on whether government support that has given households the financial ability to afford housing gives way to a strong labor market.

“There’s definitely room to run,” Ozimek said based on demographics alone. “The question is whether the economy is moving towards full employment, or whether there is a slowdown.”

Rents could rise as major cities, including New York and Los Angeles, recover from the pandemic, said Daryl Fairweather, Redfin’s chief economist. While the rental markets of smaller towns have been hot for months, the median rent in Manhattan has risen for the first time since the start of the pandemic in September, data from Miller Samuel and Douglas Elliman shows.

The recovery in the New York area as a whole has been uneven as some families have moved to the city and raised prices while others struggled to pay, said Jay Martin, executive director of the Community Housing Improvement Program, that represents landlords. mostly rent-stabilized homes.

“You have bidding wars for one unit, and then a tenant who can’t pay,” he said. “A story happens about two cities in the same building.”

Drew Hamrick, the senior vice president of the Colorado Apartment Association, a group of landlords, said the rise in rents is not driven by landlords, but by market factors.

“Landlords don’t really set the price; consumers determine the price,” he says. “It’s musical chairs.”

Even if rents will fall next year, today’s suddenly higher housing costs could lead to a painful adjustment period. Higher rental costs can reverberate in people’s lives and force them to make difficult decisions.

Luke Martinez, a 27-year-old in East Texas town of Greenville, considers buying a trailer and settling his family on an RV park after learning he’s losing the three-bedroom house he rented for about $1,000 a month since 2016.

“It’s insane the amount of rent, even in this small town of Podunk,” Martinez said.

He wants to pay up to $1,500 a month for a new place, which will be difficult. After being fired at the start of the pandemic, he lived partly on savings – supplemented by an insurance benefit after his car was stolen and declared a total loss. It wasn’t until this week that he went back to work in auto repair. His wife worked at a hotel reception until two months ago, but now homeschools their 8-year-old.

If they end up renting at the higher price, they will probably afford it by forgoing a new car.

“It’s pretty much just scraping,” he said of his lifestyle.