Shelter Costs Drive Inflation Higher Than Expected in January

January's Consumer Price Index (CPI) exhibited more volatility than expected and showed consumer prices picking up again. Core prices remained elevated, especially housing costs; the index for shelter was up 0.6% in January, following a 0.4% increase in December. That continued to put upward pressure on inflation because the index for shelter makes up more than 40% of the “core” CPI.

The uptick in prices is likely to delay the Federal Reserve's rate cuts until the second half of 2024, the National Association of Home Builders' Eye On Housing reports.

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 constrained.

In fact, further tightening of monetary policy would hurt housing supply because it would 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 months. This is supported by real-time data from private data providers that indicate a cooling in rent growth.