Inflation Eased Again in April
Fan-Yu Kuo2025-05-13T10:19:27-05:00Inflation slowed to a 4-year low in April while shelter inflation remained elevated. Despite the easing, inflation may pick up in the coming months as possible inflationary pressure from enacted tariffs and other policy uncertainties continues to threaten economic growth and complicate the Fed’s path to its 2% target. Meanwhile, housing inflation remains elevated, but it continues to show signs of cooling – the year-over-year change in the shelter index remained below 5% for an eighth straight month, matching last month’s lowest level since November 2021. While the Fed’s interest rate cuts could help ease some pressure on the housing market, its ability to address rising housing costs is limited, as these increases are driven by a lack of affordable supply and increasing development costs. In fact, tight monetary policy hurts housing supply because it increases the cost of AD&C financing. This can be seen on the graph below, as shelter costs continue to rise at an elevated pace despite Fed policy tightening. Additional housing supply is the primary solution to tame housing inflation and with it, overall inflation. This emphasizes why the cost of construction, including the cost of building materials, matters not just for housing but also the inflation outlook and the path of future monetary policy. Consequently, the election result has put inflation back in the spotlight and added additional upside and downside risks to the economic outlook. Proposed tax cuts and tariffs could increase inflationary pressures, suggesting a more gradual easing cycle with a slightly higher terminal federal funds rate. However, economic growth could also be higher with lower regulatory burdens. Given the housing market’s sensitivity to interest rates, a higher inflation path could extend the affordability crisis and constrain housing supply as builders continue to grapple with lingering supply chain challenges. During the past twelve months, on a non-seasonally adjusted basis, the Consumer Price Index rose by 2.3% in April, smallest increase since February 2021, according to the Bureau of Labor Statistics’ report. This followed a 2.4% year-over-year increase in March. Excluding the volatile food and energy components, the “core” CPI increased by 2.8% over the past twelve months. A large portion of the “core” CPI is the housing shelter index, which increased 4.0% over the year. Meanwhile, the component index of food rose by 2.8%, and the energy component index fell by 3.7%. On a monthly basis, the CPI rose by 0.2% in April (seasonally-adjusted), after a 0.1% decline in March. The “core” CPI increased by 0.2% in April. The price index for a broad set of energy sources rose by 0.7% in April, with increases in natural gas (3.7%) and electricity (0.8%) offset by decline in gasoline (-0.1%). Meanwhile, the food index fell 0.1%, after a 0.4% increase in March. The index for food away from home increased by 0.4% and the index for food at home decreased by 0.4%. The index for shelter (+0.3%) was the largest contributor to the monthly increase in all items index, accounting for more than half of the total increase. Other top contributors that rose in April include indexes for household furnishings and operations (+1.0%), medical care (+0.5%), motor vehicle insurance (+0.6%), education (+0.1%), as well as personal care (+0.1%). Meanwhile, the index for airline fares (-2.8%) and used cars and trucks (-0.5%)were among the few major indexes that decreased over the month. The index for shelter makes up more than 40% of the “core” CPI, rose by 0.3% in April, following an increase of 0.2% in March. The index for owners’ equivalent rent (OER) rose by 0.4% and index for rent of primary residence (RPR) increased by 0.3% over the month. Despite the moderation, shelter costs remained the largest contributors to headline inflation. NAHB constructs a “real” rent index to indicate whether inflation in rents is faster or slower than core inflation. It provides insight into the supply and demand conditions for rental housing. When inflation in rents is rising faster than core 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). In April, the Real Rent Index rose by 0.1%. Over the first four months of 2025, the monthly growth rate of the Real Rent Index averaged at 0.1%, higher than 0.0% from the same period in 2024. Discover more from Eye On Housing Subscribe to get the latest posts sent to your email.