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The latest Consumer Price Index (CPI) release indicates a downward trajectory of U.S. inflation, providing evidence that the Federal Reserve’s efforts to stabilize the economy are working. However, while inflation rates have decreased, they remain above the target benchmark of 2%. Housing costs continue to play a significant role in keeping inflation elevated.
The June CPI data revealed that inflation in the United States stood at 3%, down from May’s reading and reaching its lowest since March 2021. Core inflation, which excludes volatile food and energy costs, also exhibited signs of cooling as it rose 4.8% in June compared to the previous year, marking the slowest pace since October 2021.
These favorable indicators come after the Federal Reserve paused its rate hike campaign for the first time in 15 months, acknowledging the progress made in reining inflation. Despite the positive trajectory, inflation remains well above the desired 2% benchmark, prompting the expectation of at least two more rate hikes before the end of the year.
While the CPI reading shows encouraging signs, experts in the real estate industry believe that the Federal Reserve is likely to resume rate hikes in its upcoming July meeting. Dr. Lisa Sturtevant, Bright MLS chief economist, emphasizes that housing costs, which account for a significant portion of inflation, are not decreasing meaningfully and continue contributing to elevated inflation levels.
Housing costs, particularly the index for shelter, were the primary contributor to the inflation increase last month, comprising over 70% of the overall rise. The cost of shelter rose by 7.8% annually in June, highlighting the challenge of housing affordability in the current market.
Sturtevant argues that the Federal Reserve needs to have the appropriate tools to address high housing costs effectively. While higher interest rates initially cooled housing demand, the rapid increase in rates following the pandemic reduced demand as intended and severely limited supply by discouraging homeowners from listing their properties for sale.
Dr. Lawrence Yun, chief economist for the National Association of REALTORS® (NAR), acknowledges the brisk pace of rising rents but points out that they have recently shown signs of deceleration. With a one-month gain of 0.5% or a 5.8% annualized gain, rents are expected to further stabilize in the coming months. Additionally, the construction of numerous vacant apartment units may contribute to rent plateauing by next year.
Yun suggests that as consumer prices continue to decelerate, the housing market may experience steady growth in sales and increased home production shortly. He highlights the need for the Federal Reserve to consider early indicators, such as future inflation and commercial leasing activity, rather than solely focusing on lagging indicators, like job numbers when making interest rate adjustments.
While the latest CPI release indicates progress in controlling U.S. inflation, housing costs remain a significant challenge. The Federal Reserve faces balancing its mandate to contain inflation with the need to support economic growth. Addressing housing affordability and supply issues is crucial for achieving long-term economic stability.
