Inflation Slows While Housing Costs Remain Sticky

Consumer prices rose slightly in November, with a decline in the gasoline index being offset by an increase in the shelter index. The ongoing slowdown in inflation increases the probability that the Fed is done increasing rates. However, even after peaking in March this year, shelter costs continued to put upward pressure on inflation, accounting for nearly 70% of the total increase in all items excluding food and energy.

The Fed’s ability to address rising housing costs is limited because increases are driven by a lack of affordable supply and increasing development costs. Additional housing supply is the primary solution to tame housing inflation. The Fed’s tools for promoting housing supply are limited at best. In fact, further tightening of monetary policy will hurt housing supply because it will increase the cost of AD&C financing. This can be seen on the graph below, as shelter costs continue to rise despite Fed policy tightening. Nonetheless, the NAHB forecast expects to see shelter costs decline further in the coming month.  This is supported by real-time data from private data providers that indicate a cooling in rent growth.

The Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) rose by 0.1% in November on a seasonally adjusted basis, after being unchanged in October. The price index for a broad set of energy sources fell by 2.3% in November as the decline in gasoline index (-6.0%) and fuel oil index (-2.7%) more than offset the increases in natural gas index (+2.8%) and electricity index (+1.4%).  Excluding the volatile food and energy components, the “core” CPI rose by 0.3% in November, after rising 0.2% in October. Meanwhile, the food index increased by 0.2% in November with the food at home index rising 0.1%.

In November, the index for shelter (+0.4%) was the largest contributors to the increase in the core CPI. Among the other indexes that rose in November include indexes for medical care (+0.6%) and motor vehicle insurance (+1.0%). Meanwhile, the indexes for apparel (-1.3%), household furnishings and operations (-0.4%), and communication (-0.6%) declined in November.

The index for shelter, which makes up more than 40% of the “core” CPI, rose by 0.4% in November, following an increase of 0.3% in October. The indexes for owners’ equivalent rent (OER) increased and rent of primary residence (RPR) both increased by 0.5% over the month. Monthly increases in OER have averaged 0.5% over the last ten months. These gains have been the largest contributors to headline inflation in recent months.

During the past twelve months, on a not seasonally adjusted basis, the CPI rose by 3.1% in November, following a 3.2% increase in October. The “core” CPI increased by 4.0% over the past twelve months, the same increase in October. This was the slowest annual gain since September 2021. Over the past twelve months, the food index rose by 2.9% while the energy index fell by 5.4%.

NAHB constructs a “real” rent index to indicate whether inflation in rents is faster or slower than overall inflation. It provides insight into the supply and demand conditions for rental housing. When inflation in rents is rising faster than overall inflation, the real rent index rises and vice versa. The real rent index is calculated by dividing the price index for rent by the core CPI (to exclude the volatile food and energy components). The Real Rent Index rose by 0.2% in November.