Housing inflation remains sticky: 'The only thing missing' in favorable CPI print
May's Consumer Price Index contained one consistently frustrating piece of data for economists in an otherwise encouraging report: Housing inflation isn't coming down yet.
Wednesday's data from the Bureau of Labor Statistics showed that shelter costs have risen 0.4% month over month in the past four CPI prints. Housing costs remained the largest contributor to core CPI, which rose 0.2% in May.
Read more: How to protect your savings against inflation
Overall, markets had cheered the report, which showed that headline inflation eased on a monthly and annual basis.
"The only thing missing from today's report for the Fed was a further moderation in rent and owners' equivalent rent, which were little changed on the month," Stephen Juneau, US economist at Bank of America, wrote in a note after the data's release.
Rent and owners' equivalent rent each rose 0.4% on a monthly basis in May, matching April's increases. Owners' equivalent rent is the hypothetical rent a homeowner would pay for the same property.
Juneau added, "That said, measures of market rents continue to suggest that a moderation in these line items is in the pipeline."
Economists have expected slowing rent increases to show up in CPI for more than a year. The BLS surveys rent data every six months, causing a lag in the index.
"We are still waiting to see further moderation in rent of shelter," Oxford Economics lead US economist Bernard Yaros said. "We are confident that the CPI for rent of shelter will eventually downshift, given the rise in rental vacancy rates, but the timing is still uncertain."
Federal Reserve Chair Jerome Powell has echoed the sentiment.
“I am confident that as long as market rents remain low, this is going to show up in measured inflation, assuming that market rents do remain low,” Powell said during a press conference in May.
To be sure, housing inflation eased on an annual basis in May. Shelter costs increased 5.4% over the prior year, the slowest annual gain since April 2022 and lower than their peak of 8.2% in March of the previous year.
A primary factor contributing to the moderation of rent growth has been new apartment supply added to the market. Goldman Sachs economists expect overall shelter inflation to be running at a monthly pace of around 0.34% by December of this year.
But some industry experts believe there are some downside risks ahead that could reaccelerate rents, posing another inflationary hurdle for the Federal Reserve.
“The big challenge is one they're very well aware of, which is that the longer that rates stay high, the more difficult it is to continue to provide the one solution that brought rent inflation down, which is more housing supply,” Jay Parsons, head of investment strategy at Texas-based apartment owner Madera Residential, told Yahoo Finance in an interview.
Read more: What the Fed rate decision means for bank accounts, CDs, loans, and credit cards
Builders have already been dealing with rising costs, prompting a pullback in construction activity. In fact, multifamily permits have sharply declined since the start of the Fed’s hiking cycle, “which means that by the second half of ‘25 and ‘26, we can suddenly have much less supply coming into the market,” Parsons said. “Less housing construction could eventually give way to more rent inflation again in a couple years from now," Parsons said.
The single-family rental market has also felt the weight of higher rates.
"There's not a lot of new single-family rentals coming on the market," Parker Ross, global chief economist at Arch Capital Group, told Yahoo Finance. "You're going to exacerbate the supply shortage by keeping rates elevated and, if anything, cause more owner's equivalent rent inflation."
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.
Click here for the latest economic news and indicators to help inform your investing decisions.
Read the latest financial and business news from Yahoo Finance
