Does Zillow Rent Measure Help Predict CPI Rent Inflation?

This paper examines the usefulness of the Zillow Observed Rent Index (ZORI) in predicting CPI rent inflation. Using data from February 2015 to October 2023, we demonstrate that while ZORI provides valuable insights into future movements in CPI rent inflation, its effectiveness is limited to periods when there is a significant disparity between these two-rent series. By employing Giacomini and Rossi's (2010) forecast fluctuations test, we find that, before the pandemic, there was no statistically significant difference between models that incorporated Zillow rent inflation and those that did not. However, starting in June 2020, models incorporating Zillow rent inflation began to outperform forecasting models without it in predicting CPI rent inflation. This performance advantage coincides with the two-year post-pandemic period when Zillow rent inflation significantly diverged from CPI rent inflation.