In August, housing costs in the United States continued to rise, albeit not as significantly as in previous months. Surprisingly, for the first time since December of the previous year, the increase in housing costs wasn't the primary driver of inflation.
According to the Bureau of Labor Statistics (BLS), gasoline prices played a substantial role in the Consumer Price Index (CPI) increase of 0.6% from July to August. Gasoline alone accounted for over half of the overall inflationary rise. Specifically, gasoline prices rose by 10.6% during this period.
While housing remained a significant contributor to the monthly inflationary increase, its impact was slightly subdued compared to the previous month. The BLS reported that the shelter index, which considers rents, rent-equivalents, and other housing service costs, experienced a 0.3% increase from July. Although this was slower than the 0.4% rise in the previous month, it still contributed to overall inflation growth.
It is worth noting that housing costs driving the inflation gauge has been a consistent trend throughout the year. However, August marked a deviation from this pattern. This was the first time since December 2022 that housing costs did not play the leading role in driving overall inflation. In December 2022, falling gasoline costs surpassed gains in shelter costs, resulting in a decline in the monthly inflation gauge.
Within the housing sector, two sub-measures provide insights into rental costs. The rent of primary residence increased by 0.5% on a monthly basis, while owners' equivalent rent rose by 0.4%. Year-on-year, these figures translated to respective increases of 7.8% and 7.3%.
Given the persistent contribution of housing costs to the closely watched inflation reading, this trend is not entirely unexpected. The measurement methods used to track increases in rents and rent equivalents contribute to the stickiness of this component. Consequently, the CPI's reading continues to rise rapidly even as asking rents have somewhat stabilized.
Rent Inflation Expected to Moderate in August
A team of BofA economists predicts a modest slowdown in rent inflation for August, compared to the previous month. They believe that asking rent inflation measures continue to show soft increases, which will eventually lead to a decline in shelter inflation over time. This decrease in rent inflation is expected to help mitigate overall inflation in the coming months.
Record High Asking Rents Mask a More Complex Picture
According to a Redfin report, asking rents reached their highest levels in August, but there's more to the story than meets the eye. Although rents measured by the Redfin company Rent. were just $2 below last year's record high, they only increased by less than 1% compared to the previous month. Additionally, landlords are offering incentives due to increased rental supply, which temporarily reduces the actual cost of renting a property. While on paper rents remain high, the actual cost is not as steep.
Rental Supply Increase to Soften Rents
Economist and chief investment officer at Bleakley Financial Group, Peter Boockvar, suggests that real-world rental growth is around 3-4%, and he expects it to further decelerate in 2024 as more supply enters the market. Boockvar also mentions that insurance costs will contribute to upward pressure on consumer price index (CPI) in the future.
There's hope for tenants as rental supply is set to increase this year and the next. July saw a record number of large multifamily projects under construction, according to Census and Department of Housing and Urban Development data.
Moderation of Shelter Costs Remains Elusive
Despite these factors, Bankrate's chief financial analyst Greg McBride warns against assuming that rent costs are cooling down. While the latest reading suggests a slowdown in the overall shelter category, attributed to a 3% decrease in the cost of lodging away from home, any moderation in shelter costs may be short-lived. This is because home prices are rising again, which could have an impact on rental costs.