Rosalind Evans
The consumer price index’s (CPI) most influential category, housing, is a significant inflation indicator.
As the principal expense for an average American household, housing represents over a third of the CPI weighting, thus having a remarkable effect on inflation trends.
As per CPI data, inflation in the housing sector has remained markedly high for several months. However, economists anticipate that it has reached its apex and is on the verge of a downturn.
Mark Zandi, Moody’s Analytics chief economist, expressed high confidence in the imminent reduction of housing inflation.
Examining Price Fluctuations in ‘Shelter’ Before the pandemic, prices in “shelter” typically experienced minimal fluctuation, say economists.
However, the Covid-19 pandemic significantly altered this stability, causing a rapid increase in housing costs which have recently begun to slow down and even decrease in some regions, according to economists.
To illustrate, in May, average national rents rose by 4.8% from the previous year, amounting to approximately $2,048 per month, based on Zillow Observed Rent Index data. This growth rate significantly decreased from the prior year’s figure of 15.7% from May 2021 to May 2022.
The Limitations of CPI in Reflecting Housing Trends The problem is that CPI needs to reflect these price trends in real-time.
According to economists, the process involves a significant delay, and it could take six months to a year for shifts in housing prices to fully reflect in the inflation data.
Andrew Hunter, Capital Economics’ deputy chief U.S. economist, previously told CNBC that CPI doesn’t necessarily provide an accurate snapshot of current housing market conditions.
This delay is due to the method by which the U.S. Bureau of Labor Statistics collects rent data from select households biannually. These households are divided into six subgroups or “panels,” with data collection staggered across these groups. Therefore, gathering data from all panels can take up to a year.
Why Economists Predict a Downturn in Housing Inflation “Shelter continues to impact inflation significantly, but we anticipate a slowdown in the second half of the year,” Jason Furman, an economist at Harvard University and ex-chair of the White House Council of Economic Advisers during the Obama administration, stated on Twitter on Tuesday.
The most recent CPI data released on Tuesday displayed an increase in shelter inflation from 0.4% in April to 0.6% in May, equal to the monthly figure from May of the prior year.
However, a dip in CPI housing inflation is as “close to a certainty as it gets,” according to Hunter.
The BLS also uses another unique method to monitor housing inflation, which measures price changes for homeowners and renters, known as “owners’ equivalent rent.”
This approach involves a survey that estimates the rent homeowners believe they could secure if they lease their property.
Although somewhat linked to market rents, homeowners, particularly those with fixed mortgages or who own their homes outright, may not necessarily feel the inflationary pinch, noted Zandi.
The prediction of a dip in housing inflation relieves many as the cost of living rises. The fall may bring some stability to consumer price inflation overall, particularly if it significantly impacts the broader CPI, as suggested by economists. However, the time lag involved in capturing these changes in official data means that it may take some time for these benefits to be felt by the general public. As such, all eyes will be on future CPI releases to see if these forecasts come to fruition.
