Housing Costs Drive Inflation Higher

Despite a slowdown in rent growth, housing costs continue to contribute significantly to inflation. According to the Bureau of Labor Statistics, shelter inflation accounted for 90% of the 0.2% monthly increase in the consumer price index. On a yearly basis, the overall index rose by 3.2%.

In July, the broader category of shelter, which includes housing services such as rent, lodging away from home, and household insurance, experienced a 0.4% increase compared to the previous month and a 7.7% increase compared to the previous year.

The Federal Reserve has been grappling with the impact of rising housing costs on inflation. Following substantial increases in home prices and rents during the pandemic, housing costs have become a persistent concern. In March, they rose as much as 8.2% compared to the previous year.

However, measurements of shelter services costs tend to lag behind private and industry data on housing costs. As a result, the slowdown in asking rents observed in private data is likely yet to be fully reflected. In July, Zillow recorded a 3.6% increase in asking rents compared to the previous year, marking the lowest such increase since April 2021 and well below its peak of 16.2% gains in February and March 2022.

The Federal Reserve was likely not surprised by the continued growth in housing services costs in July. In their June meeting minutes, members of the Federal Open Market Committee anticipated that inflation in housing services had probably peaked and expected it to decrease throughout the year. A recent report by researchers at the Federal Reserve Bank of San Francisco also suggests that forecasting models indicate a significant slowdown in shelter inflation over the next 18 months.

Nikolai Roussanov, a finance professor at the University of Pennsylvania's Wharton School, explains that housing costs typically adjust more slowly compared to other categories. He notes that shelter was trailing behind other categories until recently.

In conclusion, while rent growth has moderated, housing costs remain a major driver of inflation. Forecasting models suggest that shelter inflation is expected to slow down significantly in the coming months and years. The Federal Reserve will continue to monitor these trends closely as it navigates its fight against inflation.

Rent Prices Show Moderate Growth, but Future Uncertain

Rent prices, a significant component of the overall shelter index, experienced a 0.4% increase in July, matching the previous month's growth rate. Expert opinion suggests that rental rates are expected to remain steady in August before potentially cooling down.

While home prices and rents continue to rise, the limited supply of homes on the market has played a role in bolstering housing prices. Homeowners have been cautious due to historically low mortgage rates.

Private measures indicate that asking rents might experience an upswing after a prolonged period of stabilization. Redfin reported that the median asking rent in July was $2,038, with a modest 0.3% year-on-year increase. This figure was just $16 shy of last summer's record high.

Redfin's deputy chief economist, Taylor Marr, cautioned that it is too early to determine if rent growth has hit its lowest point. He stated, "While rents are flattening out, it’s too early to say whether rent growth has bottomed."

Unlike home sale prices, there is no standardized metric for measuring rent growth in the industry. Therefore, the rate of change in asking rents can vary across different private companies. Zillow's data, while displaying the slowest year-over-year growth rate since 2021, also suggests signs of a potential increase according to its economists.

According to Zillow economist Jeff Tucker, rents measured in July saw a 0.5% month-over-month increase, slightly higher than pre-pandemic levels. Tucker further added, "Whether this is just a temporary adjustment for a market returning to normal seasonal appreciation or an early indication of a heating market will become clearer as more data becomes available in the coming months."

It remains to be seen how rent prices will evolve in the future. The current trend suggests some moderation, but uncertainties remain.