Key Inflation Indicator Driven by Higher Housing Costs

Consumer prices in September remained stable, with housing and gasoline cost continuing to be key drivers. Despite the slight annual slowdown, shelter costs remain elevated, accounting for over 70% of the total increase in all items excluding food and energy.

The Fed’s ability to address rising housing costs is limited as shelter cost 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 at best limited. In fact, further tightening of monetary policy will hurt housing supply by increasing 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 later in 2023, 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 0.4% in September on a seasonally adjusted basis, following an increase of 0.6% in August. The price index for a broad set of energy sources rose by 1.5% in August as the increase in gasoline index (+2.1%), electricity (+1.3%) and fuel oil index (+8.5%) more than offset the declines in natural gas index (-1.9%).  Excluding the volatile food and energy components, the “core” CPI rose by 0.3% in September, as it did in August. Meanwhile, the food index increased by 0.2% in September with the food at home index rising 0.1%.

In September, the indexes for shelter (+0.6%) and gasoline (+2.1%) were the largest contributors to the increase in the headline CPI. Meanwhile, the indexes for used car and trucks (-2.5%) and apparel (-0.8%) declined in September.

The index for shelter, which makes up more than 40% of the “core” CPI, rose by 0.6% in September, following an increase of 0.3% in August. The indexes for owners’ equivalent rent (OER) increased by 0.6% and rent of primary residence (RPR) increased by 0.5% over the month. Monthly increases in OER have averaged 0.5% over the last nine 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 3.7% in September, the same increase as in August. The “core” CPI increased by 4.1% over the past twelve months, following a 4.3% increase in August. This was the slowest annual gain since October 2021. The food index rose by 3.7% while the energy index fell by 0.5% over the past twelve months.

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 (slower) than overall inflation, the real rent index rises (declines). 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 September.