Inflation Sticks Despite Lower Housing Costs

Inflation rose to 2.7% in November, meeting predictions, but the last stretch to the Fed’s 2% objective becomes the most difficult.

Shelter expenses continued to be the primary driver of inflation, accounting for over 40% of the monthly increase.

However, the shelter index’s year-over-year change remained below 5% for the third consecutive month and reported its lowest annual gain since February 2022, indicating that housing inflation has moderated.

While the Fed’s interest rate decreases may alleviate some of the pressure on the housing market, their capacity to address growing housing costs is limited, given these increases are driven by a lack of affordable supply and rising development costs.

In effect, tight monetary policy reduces housing supply by increasing the cost of AD&C financing.

This is evident in the graph below, as shelter costs continue to climb at a rapid pace despite Fed policy tightening. Increased housing supply is the major solution to reducing housing inflation.

Furthermore, the election result has brought inflation back into focus and introduced some downside risks to the economic outlook.

Proposed tax cuts and tariffs may raise inflationary pressures, implying a more gradual easing cycle with a slightly higher terminal federal funds rate.

Given the housing market’s sensitivity to interest rates, this might exacerbate the affordability crisis and limit housing supply as builders cope with ongoing supply chain challenges.

According to the Bureau of Labor Statistics, the Consumer Price Index (CPI) increased by 2.7% in November over the previous year, on a non-seasonally adjusted basis. This followed a 2.6% increase year on year in October.

Excluding the volatile food and energy components, the “core” CPI climbed by 3.3% over the previous twelve months, matching the increase seen in the previous two months. The food component index increased by 2.4%, while the energy component index declined by 3.2%.

On a monthly basis, the CPI increased by 0.3% in November, seasonally adjusted, following a 0.2% increase in October. The “core” CPI grew by 0.3% in November, matching the gain seen in the previous three months.

In November, the price index for a broad range of energy sources increased by 0.2%, with losses in electricity (-0.4%) offset by increases in gasoline (+0.6%), natural gas (+1.0%), and fuel oil (+0.6%). Meanwhile, the food index increased 0.4%, following a 0.2% rise in October.

The index for food away from home rose by 0.3%, while the index for food at home climbed by 0.5%.

The shelter index (+0.3%) contributed the most to the monthly increase in the overall index, accounting for approximately 40% of the entire increase.

Other major contributions that increased in November include used car and truck indices (+2.0%), domestic furnishings and operations (+0.6%), medical care (+0.3%), and new vehicles (+0.6%).

Meanwhile, the communication index (-1.0%) was one of the few significant indicators that fell over the month.

The shelter index, which accounts for more than 40% of the “core” CPI, increased by 0.3% in November, following a 0.4% rise in October.

Both the owners’ equivalent rent (OER) and rent of primary residence (RPR) indices rose by 0.2% this month. The rent index showed the smallest monthly increase between April and July 2021.

Despite the reduction, shelter expenses remained the most significant contributors to headline inflation.

The NAHB creates a “real” rent index to determine whether rent inflation is faster or slower than overall inflation.

It gives information on the availability and demand for rental homes. When rent inflation exceeds general inflation, the actual rent index increases, and vice versa.

The real rent index is determined by dividing the rental price index by the core CPI (which excludes the volatile food and energy components).

In November, the Real Rent Index decreased 0.1%, marking the first negative reading since December 2021.

Over the first eleven months of 2024, the Real Rent Index’s monthly growth rate averaged 0.1%, less than the 0.2% average in 2023.

[Read more about this topic on Eyeonhousing.org]