Housing Costs Remain Elevated, Impacting Inflation Data
In March, housing costs continued to rise, raising concerns about the timing of when a recent easing of apartment rents will be reflected in the US government’s inflation data, and whether this softening trend will persist.
- The shelter component of the Consumer Price Index (CPI), mainly composed of rent and homeowners’ equivalent rent (OER), increased by 0.4% over the previous month, matching February’s gain. Year over year, shelter costs rose by 5.7%, consistent with the previous month’s annual increase.
Outlook for Rent Inflation
Despite market-based measures of rent growth cooling over the past year, the monthly pace of shelter inflation has remained elevated around 0.45% since last June. Economists expect the trend of softened apartment rents to eventually show up in the CPI data, but there is uncertainty about the timing of this adjustment.
- Federal Reserve Chairman Jerome Powell noted in a March press conference that housing inflation is expected to trend lower, but uncertainty remains regarding the exact timing of this trend reversal.
Impact on Core CPI and Future Projections
Shelter costs accounted for 60% of March’s overall monthly gain in core CPI, which excludes food and energy. Some Wall Street economists anticipate the shelter component of CPI to reach a bottom by spring or summer of the following year, given its persistence.
- However, there are concerns that the growth in rents may tick back up this year, especially in the single-family rental market, which could exert upward pressure on rent growth over the medium term.
Conclusion
While March’s annual gain in shelter costs has decreased significantly from its peak a year ago, there are indications that the trend of softened rents may not fully translate into CPI data immediately. Economists are closely monitoring market indicators to gauge the future trajectory of rent inflation, with some suggesting a continued deceleration in CPI rents as the year progresses.
