Rents and other housing prices are emerging as a significant driver of total consumer inflation, keeping it high even as many additional drivers of inflation begin to decline. Economists predict home inflation to rise higher before slowing in the coming months, although they are uncertain when this is likely to occur. The Federal Reserve has a new difficulty as it hikes interest rates to relieve pricing pressures.
According to the Labor Department’s consumer-price index, overall annual inflation fell to 8.3% in August from 8.5% in July. This represented price decreases from the previous month for products such as fuel, airlines, and used automobiles, as well as slower price rises in other categories such as grocery.
The housing market was an exception. Not only are housing expenses rising, but they are rising quickly, accounting for a larger percentage of overall inflation—nearly 25% of August’s rate, up from roughly 20% in February.
Shelter costs—primarily rentals and a measure of property prices known as owners’ equivalent rent, rose 0.7% in August compared to the previous month, up from 0.5% in July. Compared to last year, they increased 6.2% in August and 5.7% in July. Housing costs were always going to be a sustained lift to inflation this year, according to Omair Sharif, CEO of the consulting firm Inflation Insights LLC. It has risen in the previous three months, offsetting drops in flights and hotel costs.
To combat inflation, which reached a 40-year high in June, the Fed has hiked interest rates at the quickest pace in decades this year. After their two-day policy meeting concludes on Wednesday, they are likely to raise rates by 0.75 percentage points, and that would be the third rise of that magnitude in a row.
Rising Housing costs increase the chance that at the Fed’s November policy meeting, the rate will likely increase again by 0.75 percentage points, according to analysts at Barclays in client research.
Economists and organizations analyzing private data predict that housing inflation in the CPI will ultimately decline since rent rises in new leases appear to moderate. Because of how the CPI is created, they believe it will appear with a lag. Most tenants pay the same amount every month. However, those who renew or sign new leases are more likely to experience an increase. Private companies that track rental pricing, such as Apartment List Inc., record the rent amounts in new agreements.
According to Apartment List statistics, the typical U.S. rent jumped 10% from the previous year in August, down from a recent record of 18% in November 2021. The rent component of the CPI, on the other hand, is calculated based on rentals paid across the market, including prices raised months ago.
Short mortgage rates, changes in house-buying tastes, demographic patterns, and low inventories of properties for sale all contributed to a jump in housing values during the pandemic. However, government organizations do not explicitly incorporate home prices when measuring inflation since they regard a home purchase as a long-term investment rather than a consumer commodity.
Instead of using owners’ equivalent rent, the CPI calculates imputed rent or what homeowners would have to pay monthly to rent their own house.
Rents have risen significantly in the last year, and these gains are now seeping into the CPI and other inflation indexes.
According to Igor Popov, chief economist at Apartment List, private estimates offer hopes that housing inflation in the CPI may reduce at some point. There’s growing concern that, in the interim, the housing component is essentially propping up inflation when these figures are being scrutinized. According to Mr. Sharif, shelter cost rises should begin to slow in the fourth quarter of 2022 or the first quarter of 2023. According to experts at Barclays, it will happen this fall. According to Brett Ryan, senior economist at Deutsche Bank, the peak will not occur until the second quarter of next year. Dallas Fed economists stated last month that the CPI does not reflect rent reductions until more than a year and a half aftermarket rents begin to fall.