Consumer prices eased slightly from a 40-year high in July as declines in energy prices offset increases in food and shelter indexes. Despite this improvement, inflation remains above an 8% rate for a fifth straight month. The food index recorded its largest annual gain since May 1979 as all six major grocery store food group indexes increased. Nonetheless, it is likely that both core PCE and CPI measures of inflation have now peaked as tighter monetary policy from the Fed slows the housing market and overall economy.
The Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) was unchanged in July on a seasonally adjusted basis, following an increase of 1.3% in June. The price index for a broad set of energy sources fell by 4.6% in July, with a decline in gasoline (-7.7%) and the natural gas index (-3.6%). Excluding the volatile food and energy components, the “core” CPI increased by 0.3% in July, following an increase of 0.7% in June. Meanwhile, the food index increased by 1.1% in July as the index for food at home rose by 1.3%.
Most component indexes continued to rise in July. The indexes for shelter (+0.5%), medical care (+0.4%), motor vehicle insurance (+1.3%), household furnishings and operations (+0.6%), new vehicle (+0.6%) and recreation (+0.3%) showed sizeable monthly increases in July. Meanwhile, the indexes for airline fares (-7.8%), used car and trucks (-0.4%), communication (-0.4%) and apparel (-0.1%) declined in July.
The index for shelter, which makes up more than 40% of the “core” CPI, rose by 0.5% in July, following an increase of 0.6% in June and May. The indexes for owners’ equivalent rent (OER) increased by 0.6% and rent of primary residence (RPR) rose by 0.7% over the month. Monthly increases in OER have averaged 0.6% over the last three months. More cost increases are coming from this category, which will add to inflationary forces in the months ahead. These higher costs are driven by lack of supply and higher development costs. Higher interest rates will not slow these costs, which means the Fed’s tools are limited in addressing shelter inflation.
During the past twelve months, on a not seasonally adjusted basis, the CPI rose by 8.5% in July, following an 9.1% increase in June. The “core” CPI increased by 5.9% over the past twelve months, the same increase in June. The food index rose by 10.9% and the energy index climbed by 32.9% over the past twelve months.
NAHB constructs a “real” rent index to indicate whether inflation in rents is faster or slower than overall inflation. It provides insight into the supply and demand conditions for rental housing. When inflation in rents is rising faster (slower) than overall inflation, the real rent index rises (declines). The real rent index is calculated by dividing the price index for rent by the core CPI (to exclude the volatile food and energy components).
The Real Rent Index rose by 0.4% in July. Over the first seven months of 2022, the monthly change of the Real Rent Index increased by 0.1%, on average.