Inflation Remains Sticky due to Persistent Housing Costs

2024-02-13T11:15:21-06:00

Consumer prices picked up again in January while core prices remained elevated, especially housing costs. Despite a slowdown in the year-over-year increase, shelter costs continue to put upward pressure on inflation, accounting for over two-thirds of the total increase in all items excluding food and energy. This hotter-than-expected report will almost certainly delay Fed rate cuts until the second half of the year. 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. With respect to the aggregate data, the Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) rose by 0.3% in January on a seasonally adjusted basis, after rising 0.2% in December. The price index for a broad set of energy sources fell by 0.9% in January as the decline in gasoline index (-3.3%) and fuel oil index (-4.5%) more than offset the increase in the natural gas index (+2.0%) and electricity index (+1.2%). Meanwhile, the food index and the food at home index both increased by 0.4% in January. Excluding the volatile food and energy components, the “core” CPI rose by 0.4% in January, after rising 0.3% in December. In January, the index for shelter (+0.6%) continued to be the largest contributor to the monthly increase in the core CPI. Among other top contributors that rose in January include indexes for motor vehicle insurance (+1.4%) and medical care (+0.5%). Meanwhile, the top contributors that experienced a decline in January include indexes for used cars and trucks (-3.4%) and apparel (-0.7%). The index for shelter makes up more than 40% of the “core” CPI. The index saw a 0.6% rise in January, following an increase of 0.4% in December. The indexes for owners’ equivalent rent (OER) increased by 0.6% and rent of primary residence (RPR) increased by 0.4% over the month. These gains have been the largest contributors to headline inflation in recent months. During the past twelve months, on a non-seasonally adjusted basis, the CPI rose by 3.1% in January, following a 3.4% increase in December. The “core” CPI increased by 3.9% over the past twelve months, the same increase for the 12-months ending December. This was the slowest annual gain since May 2021. Over the past twelve months, the food index rose by 2.7% while the energy index fell by 2.0%. NAHB constructs a “real” rent index to indicate whether inflation in rents is faster or slower than overall inflation. It provides insight into the supply and demand conditions for rental housing. When inflation in rents is rising faster than overall inflation, the real rent index rises and vice versa. The real rent index is calculated by dividing the price index for rent by the core CPI (to exclude the volatile food and energy components). The Real Rent Index was unchanged in January. ‹ Modest Improvements in Demand, Lending Conditions for Real Estate Loans During Q4 2023Tags: BLS, cpi, inflation

Inflation Remains Sticky due to Persistent Housing Costs2024-02-13T11:15:21-06:00

Inflation Slows While Housing Costs Remain Sticky

2023-12-12T10:28:42-06:00

Consumer prices rose slightly in November, with a decline in the gasoline index being offset by an increase in the shelter index. The ongoing slowdown in inflation increases the probability that the Fed is done increasing rates. However, even after peaking in March this year, shelter costs continued to put upward pressure on inflation, accounting for nearly 70% of the total increase in all items excluding food and energy. 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 limited at best. In fact, further tightening of monetary policy will hurt housing supply because it will 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 month.  This is supported by real-time data from private data providers that indicate a cooling in rent growth. The Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) rose by 0.1% in November on a seasonally adjusted basis, after being unchanged in October. The price index for a broad set of energy sources fell by 2.3% in November as the decline in gasoline index (-6.0%) and fuel oil index (-2.7%) more than offset the increases in natural gas index (+2.8%) and electricity index (+1.4%).  Excluding the volatile food and energy components, the “core” CPI rose by 0.3% in November, after rising 0.2% in October. Meanwhile, the food index increased by 0.2% in November with the food at home index rising 0.1%. In November, the index for shelter (+0.4%) was the largest contributors to the increase in the core CPI. Among the other indexes that rose in November include indexes for medical care (+0.6%) and motor vehicle insurance (+1.0%). Meanwhile, the indexes for apparel (-1.3%), household furnishings and operations (-0.4%), and communication (-0.6%) declined in November. The index for shelter, which makes up more than 40% of the “core” CPI, rose by 0.4% in November, following an increase of 0.3% in October. The indexes for owners’ equivalent rent (OER) increased and rent of primary residence (RPR) both increased by 0.5% over the month. Monthly increases in OER have averaged 0.5% over the last ten months. These gains have been the largest contributors to headline inflation in recent months. During the past twelve months, on a not seasonally adjusted basis, the CPI rose by 3.1% in November, following a 3.2% increase in October. The “core” CPI increased by 4.0% over the past twelve months, the same increase in October. This was the slowest annual gain since September 2021. Over the past twelve months, the food index rose by 2.9% while the energy index fell by 5.4%. NAHB constructs a “real” rent index to indicate whether inflation in rents is faster or slower than overall inflation. It provides insight into the supply and demand conditions for rental housing. When inflation in rents is rising faster than overall inflation, the real rent index rises and vice versa. The real rent index is calculated by dividing the price index for rent by the core CPI (to exclude the volatile food and energy components). The Real Rent Index rose by 0.2% in November. ‹ Geography of Personal Income and Home buildingTags: cpi, inflation, shelter

Inflation Slows While Housing Costs Remain Sticky2023-12-12T10:28:42-06:00

Unraveling the Complex Tapestry of Inflation Dynamics: Post-Covid Changes

2023-11-30T09:15:54-06:00

The report from the Federal Reserve Bank of Boston discusses the recent trends in consumer price inflation, focusing on the period from 2021 to June 2023. After experiencing elevated readings in 2021 and 2022, inflation has moderated this year. The total consumer price index (CPI) decreased from 6.4 percent in December 2022 to 3.1 percent in June 2023, with core inflation (excluding food and energy prices) declining from 5.7 percent to 4.9 percent over the same period. However, the moderation in inflation is not uniform across all sectors. Persistently high shelter inflation, accounting for 43 percent of the core CPI consumption basket, has contributed to the stickiness in core inflation. Excluding shelter from the core index, inflation slowed from 4.5 percent to 2.8 percent. The trimmed-mean CPI and median CPI, which downweight extreme price movements, also declined but showed divergent trends. The Fed’s analysis delves into the distribution of inflation across consumption categories, revealing atypical features. While there have been declines in extreme tails (90th and 10th percentiles), intermediate percentiles continue to exhibit elevated inflation. The distribution shows bimodality, with some sectors experiencing low inflation and others showing relatively high inflation. This is particularly evident in the core inflation distribution excluding shelter and used vehicles. The findings suggest that sectoral adjustments play a crucial role in driving inflation dynamics, consistent with the easing of supply bottlenecks. However, there is uncertainty about the persistence of supply-side factors influencing inflation. The distributional analysis indicates that the dispersion in the distribution of price changes is still atypical, although it is moving closer to pre-pandemic patterns. The report emphasizes the role of sector-specific price adjustments in recent inflation dynamics, a phenomenon less pronounced in the years preceding the pandemic. It notes that the persistence of inflation ranks has been relatively low, cautioning against selectively focusing on categories with surprisingly low or high inflation. Further analysis of the inflation outlook suggests optimism, with a decline in some measures of underlying inflation. However, caution is advised, as the distribution remains somewhat bimodal, unlike periods of low inflation before the pandemic. The decline in inflation has been influenced by unusually large deflation in some categories, which may not be sustained. In conclusion, the publication provides a detailed analysis of recent inflation trends, highlighting the complex and uneven nature of inflation dynamics across consumption categories. It underscores the importance of considering sector-specific adjustments and warns against overly optimistic interpretations of recent improvements in inflation metrics. ‹ Declines for AD&C LendingTags: Boston Fed, cpi, housing costs, inflation, shelter

Unraveling the Complex Tapestry of Inflation Dynamics: Post-Covid Changes2023-11-30T09:15:54-06:00

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