Housing costs still 'largest factor' in monthly inflation uptick
Housing inflation continued to be sticky last month.
The shelter component of the Consumer Price Index (CPI) increased 0.4% in November from the previous month, up from October's 0.3% monthly gain. That made it the "largest factor in the monthly increase in the index for all items [except] food and energy," the Bureau of Labor Statistics said Tuesday.
Shelter prices make up about a third of overall inflation. The shelter index factors in the national costs of housing for both renters and homeowners, as well as lodging away from home, and tenants’ and household insurance.
The index grew 6.5% in the 12 months through November — lower than October’s annual gain of 6.7% and March’s peak of 8.2%.
Still, November’s results signal "the task the Fed still has ahead of itself to bring services and housing inflation to heel," Scott Anderson, chief US economist at BMO Capital Markets, wrote in a note after the release.
Read more: What the Fed rate-hike pause means for mortgage rates and loans
Analysts had expected shelter costs to remain sticky ahead of Tuesday's report. But there could be relief ahead.
Due to the mechanics of how housing is captured in the official inflation data, "we don't see the primary move downward in shelter until springtime. It's still a little early," RSM US Chief Economist Joe Brusuelas, told Yahoo Finance ahead of the release.
Owner’s equivalent rent, or OER, and rent hold the biggest weight in the shelter index. OER estimates what people would need to pay if they rented homes equivalent to the property they own and indirectly factors in home price growth.
OER makes up 74% of the shelter index and contributes 24.42% to overall CPI, while rent accounts for a smaller portion of both — 22% of the shelter index and 7.5% of CPI.
Last month, OER rose 0.5% month over month, up from October’s 0.4% increase, while rent prices were unchanged from the previous month, logging in another 0.5% gain.
The rent component is a notoriously lagging indicator, not reflecting real-time data. The rental market has cooled in part because there’s a lot more inventory, pushing landlords to grapple with rising vacancies and having less leverage to raise rents.
Neil Dutta, head of Economics at Renaissance Macro Research, told Yahoo Finance ahead of the release that "the fact that those market-based rent measures are so weak does suggest that there's a pipeline of disinflation in shelter that's coming over the next several quarters."
Separately, home prices — which indirectly impact OER — have continued to set record highs amid housing affordability constraints. The S&P CoreLogic Case-Shiller National Home Price Index increased 0.7% in September from August on a seasonally adjusted basis and logged a 3.9% annual gain for the month.
Read more: How to buy a home
Home prices aren’t expected to cool off anytime soon. Goldman Sachs housing economists estimate that prices will appreciate 1.8% and 2.9%, respectively, over the next two years amid low supply.
"It’s a little bit of a question mark. [Shelter] is going to continue to trend down. It's just not clear how fast it's going to get there to the Fed's target number," Jay Parsons, senior vice president and chief economist at RealPage, told Yahoo Finance.
Read more about the latest inflation data:
Inflation cools further in November as energy prices fall, housing costs remain sticky
Gas prices fell 6% in November, leading inflation’s cooldown
Inflation: Grocery prices spiked during the pandemic but are now moderating
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.
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