KEY POINTS
- The consumer price index reading for October was cooler than expected, fueling hope that inflation may further ease in coming months.
- However, housing may dampen improvement due to a lag effect related to rent and home prices.
- Shelter is the biggest part of consumers’ budgets and accounts for a third of CPI.
There are signs inflation may fall further in coming months, but housing threatens to mute any improvement.
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The consumer price index, a key barometer of inflation, rose 7.7% in October from a year ago. While still quite high by historical standards, that annual reading was the smallest since January.
The monthly increase was also smaller than expected — giving hope that stubbornly high inflation, and the negative impact it’s had on consumers’ wallets, may be easing.
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Yet the cost of shelter jumped by 0.8% in October — the largest monthly gain in 32 years. That may seem counterintuitive at a time when many observers have said the U.S. is in a “housing recession.”
But shelter inflation — as reflected in the CPI, at least — is likely to stay elevated for several months to a year given its importance in household budgets and the intrinsic dynamics of rental and housing markets, economists said.
“As the housing market cools, this category will also ease but we may have to wait until next year before it meaningfully dampens headline inflation,” said Jeffrey Roach, chief economist for LPL Financial.
Housing is the biggest piece of household spending
The U.S. Bureau of Labor Statistics, which issues the CPI report, breaks the “shelter” category into four components: rent, lodging away from home (e.g., hotels), tenants’ and household insurance, and owners’ equivalent rent of residences. Rent and “owners’ equivalent rent” are by far the most significant