Shelter costs rose again in August, but there’s an asterisk

The Consumer Price Index (CPI) increased 0.6% month-over-month and 3.7% year-over-year in August, the U.S. Bureau of Labor Statistics reported on Wednesday. It’s the second consecutive month of rising inflation, with the CPI having risen 0.2% in July. 

Core inflation, which excludes food and energy, rose 4.3% in August, down from last month’s 4.7% annual increase, but still well above the Fed’s 2% target. It is the metric most closely watched by the Federal Reserve.

Indexes that increased in August include rent, owners’ equivalent rent, motor vehicle insurance, medical care, and personal care. The indexes for lodging away from home, used cars and trucks, and recreation were among the categories that decreased over the month.

Gasoline was the largest contributor in August, accounting for over half of the monthly increase, while shelter remained another big contributor. 

“Shelter has been decelerating year over year since April, but remains high, pushing up services inflation,” noted First American Economist Ksenia Potapov.

Housing continues to contribute an outsized share to the inflation measures

If shelter was excluded from the CPI calculation, inflation would be about 1%, said Bright MLS Chief Economist Lisa Sturtevant. The rent index was up 7.2% in August, rising for the 40th consecutive month. Meanwhile, rent growth slowed considerably and median rents nationally fell year-over-year in August, according to Sturtevant. Additionally, apartment construction is strong, which puts an additional pressure on landlords to avoid vacancy. In the second quarter of 2023, the national vacancy rate was 6.3%, up from 5.6% a year earlier.

However, it takes months for those aggregate rent trends to show up in the CPI measures.

Sturtevant hopes that the Fed will take into account these trends when it takes its “data driven” approach to deciding on interest rate policy at their meeting of the FOMC later this month.

“The recent rent and house price declines are only just starting to show up in the CPI and will likely drag down headline CPI through 2024,” added Potapov.

Lawrence Yun, the chief economist at the National Association of Realtors, said the monthly rent inflation gain was the slowest in two years at 0.29%, or a 3.5% annualized rate.

“Private sector apartment rent data is implying even slower gains,” he siad. “That means that a heavyweight component of overall inflation will be much calmer in upcoming months. Inflation will be one main determining factor in upcoming monetary policy decisions. Overdoing the rate hikes, considering that inflation is likely to calm, will unnecessarily damage the economy.”

Traditionally, shrinking rents tend to be a good sign that inflation will ultimately continue to move lower. However, falling rents might also boost rental demand, as some prospective homebuyers are priced out of homeownership by 7%+ mortgage.  

“The key is for sustained delivery of new housing supply in places where demand is the strongest,” concluded Sturtevant.