Housing remains a chief driver of inflation
Inflation ticked up a little in December, according to the latest consumer price index from the Bureau of Labor Statistics. Prices rose 0.4% month over month and were up 2.9% year over year.
As has been the case for many months now, shelter is a big part of what’s driving inflation. Rent and owners’ equivalent rent were 4.6% higher in December than a year earlier.
Housing is most people’s biggest expense by far. Steve Reed, a senior economist at the Bureau of Labor Statistics, said that’s why it weighs so heavily in the consumer price index.
“Over 36% of the whole CPI is shelter,” he said. So as long as housing costs remain high, inflation can only go so low. “Purely mathematically, it’s hard to get a low headline number without shelter numbers coming down.”
Shelter numbers have actually come down a fair amount since March 2023 — that’s when housing inflation peaked at 8.2%. Now it’s 4.6%.
Susan Wachter at the University of Pennsylvania’s Wharton School calls that good news. “Shelter inflation has come down, and it is coming down, and it will come down,” she said.
But it still has a ways to go if overall inflation is going to reach the Federal Reserve’s 2% target.
And, Wachter said, that could take a while because so many homeowners have low mortgage rates they are loath to give up. That keeps homes off the market.
“Demand is strong because the economy is strong, but supply is still limited, and so prices are increasing,” she said.
But not nearly as quickly as they once were. That’s partly because affordability, if you do want to buy, has become so bad that fewer people are looking. Those who do look are getting into bidding wars.
Secondly, “we’re building a lot of apartments, and those are coming online,” said Logan Mohtashami, lead analyst at HousingWire.
He said all that new supply is helping drive rents down, at least in some markets, like Austin, Texas. In others, like New York City, inventory is still very tight.
And then you have Los Angeles, where thousands of people have lost their homes in the last week and they’re now looking for temporary places to live.
“I’ve talked to some of my real estate agent friends, and one said there was 167 people applying for one rental,” said Mohtashami. “And that’s inflationary. … Natural disasters are inflationary in the local markets.”
But, as huge as these losses are in Los Angeles, he said they’re unlikely to raise shelter costs — or inflation — at the national level.
There’s a lot happening in the world. Through it all, Marketplace is here for you.
You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible.
Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.