An ‘open house’ flag is displayed outside a single family home on September 22, 2022 in Los Angeles, California.
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There are signs that inflation may decrease further in the coming months, but housing threatens to silence any improvement.
The consumer price index, a key barometer of inflation, changed to +7.7% in October from a year ago. While still relatively high by historical standards, the annual reading was the smallest since January.
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The monthly increase was also smaller than expected – giving hope that inflation is stubbornly high, and the negative impact on consumers’ wallets, maybe easing.
Yet housing costs jumped by 0.8% in October – the biggest monthly gain in 32 years. That may seem counterintuitive at a time when many observers say the U.S. is in “housing recession.”
But shelter inflation – as reflected in the CPI, at least – is likely to remain elevated for several months to a year given its importance in household budgets and the intrinsic dynamics of the rental and housing market, said economists.
“As the housing market cools, this category will also be comfortable but we may have to wait until next year before meaningfully dampens headline inflation,” said Jeffrey Roach, chief economist for LPL Financial.
The US Bureau of Labor Statistics, which issued the CPI report, breaks down the category of “shelter” into four components: rent, lodging away from home (eg hotel), rent ‘and household insurance, and owner’ equivalent rent of residences.
Rent and “tenancy equal to owner” are the most important.
The latter is trying to put homeowners on parity with renters. It basically reflects what a homeowner pays to rent a home, said Cristian deRitis, deputy chief economist at Moody’s Analytics.
Housing is one of the biggest expenses for the average consumer. The overall CPI weighting reflects that: Shelter accounts for 33% of that, most of all categories. The shelter therefore has an outsize impact on the overall inflation from month to month.
The shelter category grew by 6.9% last year.
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Swelling demand has caused home prices and rents to cool or moderate in many parts of the United States
New US home listings in the month, through Nov. 6, were down 17.5% compared to the same period a year earlier, according to to Redfin, a real estate brokerage. The typical sale price, $359,000, is down more than 8% from its peak of $392,000 in June, according to Redfin.
Meanwhile, rental inflation has slowed in 2022 from its breakneck pace last year, Zillow data shows.
Americans pay an average of $ 2,040 rent market October 31, according to Zillow observed Rent Indexwhich is seasonally adjusted.
That rental price rose 0.31% from a month earlier, on September 30. But the pace of growth has slowed for four consecutive months. By comparison, rents have jumped about 1% in the month from the end of May to the end of June. Rental inflation hit 2% a month in July and August 2021, according to Zillow data.
The CPI for “shelter” has historically lagged changes in house prices by four quarters, which indicates that the shelter “will continue to put upward pressure on overall inflation through the first half of 2023,” according to deRitis.
The lag effect is largely due to how long it takes for leases to roll over into new contracts. Landlords usually renew leases every 12 months, which means that current price dynamics will not be reflected in new contracts for a year.
In this case, housing is a bit outlier among other CPI categories. Customers do not agree to pay the same price chicken or egg for a whole year, for example.
“Housing has some unique aspects,” deRitis said.
And the rent tends to be “close,” according to economists – which means the total dollar amount of one’s monthly rent generally does not decline; it tends to stay the same or increase with each new lease.