By In August, housing costs continued to increase, but for the first time since December, they weren’t the main contributor to a monthly rise in inflation.
According to the Bureau of Labor Statistics, gasoline was the largest factor behind the index’s seasonally-adjusted 0.6% increase in August compared to July. In fact, gasoline accounted for more than half of the overall increase, with a gain of 10.6% between August and July.
While housing costs still played a role in the monthly increase of the consumer price index, it was not the biggest contributor. The shelter index, which includes measures of rents, rent-equivalents, and other housing service costs, only increased by 0.3% from July—a slower gain compared to the 0.4% increase in the previous month.
Although housing costs have been driving the overall increase in the inflation gauge, it is noteworthy that they weren’t the primary cause in August. The last time housing wasn’t primarily responsible for the overall gain in inflation was in December 2022 when falling gasoline costs outweighed gains in shelter costs, resulting in an overall decline in the monthly inflation gauge.
Specifically, two sub-measures of housing rental costs, rent of primary residence and owners’ equivalent rent, experienced respective month-over-month gains of 0.5% and 0.4%. Compared to the previous year, they were respectively 7.8% and 7.3% higher.
The persistent contribution of housing costs to the closely watched inflation reading shouldn’t come as a surprise. Due to the way rent and rent equivalents are measured, this component tends to be sticky. While asking rents may have cooled down, the CPI’s reading continues to increase rapidly.
Rental Market Update: A Closer Look at Rent Trends
A recent report by BofA economists suggests that there may be a slight slowdown in rent growth in August compared to the previous month. However, they also expect that inflation in the shelter market will eventually decrease as asking rent inflation figures continue to show soft increases. This anticipated decline in rent inflation should help maintain a stable inflation rate in the upcoming months.
Despite these predictions, asking rents reached record highs in August, based on a Redfin report. However, the situation may not be as concerning as it initially seems. In fact, Redfin’s data reveals that rents were only $2 below their record-high level set last year, with an increase of less than 1% from the previous month. Additionally, some landlords are offering incentives due to increased rental supply, which temporarily reduces the actual cost of occupying a rental unit, even though rents remain high on paper.
Peter Boockvar, an economist and chief investment officer at Bleakley Financial Group, suggests that real rental growth is closer to 3-4%, and this is expected to slow down further in 2024 when a significant amount of rental supply enters the market. Furthermore, Boockvar highlights that increased insurance costs will contribute to upward pressure on the Consumer Price Index (CPI) in the future.
Looking ahead, experts anticipate that the rental market will become more tenant-friendly as rental supply increases this year and the next. A record number of large multifamily projects are currently under construction, according to the most recent data from the Census and the Department of Housing and Urban Development.
However, Bankrate’s chief financial analyst, Greg McBride, emphasizes that August’s reading should not be interpreted as a cooling off of rent costs. McBride believes that any moderation in shelter costs might be short-lived since home prices are on the rise again. He notes that the 3% decline in the cost of lodging away from home has contributed to the overall slowdown in the shelter category.
In conclusion, while there are expectations of a possible moderation in rent growth, the rental market remains competitive. The impact of increased rental supply and rising home prices will play a significant role in shaping future rent trends.
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