Inflation Falls Below 3% Amid Persistent Housing Costs
Inflation dropped below a 3% annualized growth rate for the first time since March 2021 even though housing costs continue to climb. Nonetheless, the headline reading is another dovish signal for future monetary policy, following signs of weakness in the most recent job report.
Despite a slowdown in the year-over-year increase, shelter costs continue to exert significant upward pressure on inflation, contributing nearly 90% of the monthly increase in overall inflation and more than 70% of the total 12-month increase in core inflation. As consistent disinflation and a cooling labor market bring the economy into better balance, the Federal Reserve is likely to further solidify behind the case for rate cuts, which could help ease some pressure on the housing market.
The Fed’s ability to address rising housing costs is limited because increases are driven by a lack of affordable supply and increasing development costs. Additional housing supply is the primary solution to tame housing inflation. However, the Fed’s tools for promoting housing supply are constrained. In fact, further tightening of monetary policy would hurt housing supply because it would increase the cost of AD&C financing.
Nonetheless, the NAHB forecast expects to see shelter costs decline further in the coming months. NAHB Senior Economist Fan-Yu Kuo delves into the data in this Eye on Housing post.
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