Inflation May Be Falling, but Housing Costs Are Staying High

The Bureau of Labor Statistics (BLS) reports that the Consumer Price Index (CPI) remained unchanged in October on a seasonally adjusted basis, following an increase of 0.4% during September, the National Association of Home Builders' (NAHB) Eye on Housing reports. At the same time, the index for shelter, which NAHB points out makes up more than 40% of the “core” CPI, rose by 0.3% in October, following a 0.6% increase in September. That makes the shelter index the largest contributor to October's increase in the core CPI.

This cooling inflation increases the probability that the Fed is done increasing rates. Despite the slowdown, shelter costs continue to be a key driver of inflation, accounting for over 70% of the total increase in all items excluding food and energy.

The Fed’s ability to address rising housing costs is limited as shelter cost 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 at best limited. In fact, further tightening of monetary policy will hurt housing supply by increasing 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 later in 2023, supported by real-time data from private data providers that indicate a cooling in rent growth.

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