Inflation Shows Further Signs of Cooling

Consumer prices in March saw the smallest year-over-year gain since May 2021 with a ninth consecutive month of a deceleration. While the shelter index (housing inflation) experienced its smallest monthly gain since November 2022, it continued to be the largest contributor to the total increase, accounting for over 60% of the increase in all items less food and energy.

The Fed’s ability to address rising housing costs is limited as shelter cost increases are driven by a lack of affordable supply and increasing development costs. Additional housing supply is the primary solution to tame housing inflation. The Fed’s tools for promoting housing supply are at best limited. In fact, further tightening of monetary policy will hurt housing supply by increasing the cost of AD&C financing. This can be seen on the graph below, as shelter costs continue to rise despite Fed policy tightening. Nonetheless, the NAHB forecast expects to see shelter costs decline later in 2023.

The Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) rose by 0.1% in March on a seasonally adjusted basis, following an increase of 0.4% in February. The price index for a broad set of energy sources fell by 3.5% in March as the gasoline index (-4.6%), the natural gas index (-7.1%) and the electricity index (-0.7%) all decreased.  Excluding the volatile food and energy components, the “core” CPI rose by 0.4% in March, following an increase of 0.5% in February. Meanwhile, the food index was unchanged in March with the food at home index falling 0.3%.

Most component indexes continued to increase in February. The indexes for shelter (+0.6%), motor vehicle insurance (+1.2%), airline fares (+4.0%), household furnishings and operations (+0.4%) as well as new vehicles (+0.4%) showed sizeable monthly increases in March. Meanwhile, the indexes for used cars and trucks (-0.9%) and medical care (-0.3%) declined in March.

The index for shelter, which makes up more than 40% of the “core” CPI, rose by 0.6% in March, following an increase of 0.8% in February. The indexes for owners’ equivalent rent (OER) and rent of primary residence (RPR) both increased by 0.5% over the month. Monthly increases in OER have averaged 0.6% over the last three months. These gains have been the largest contributors to headline inflation in recent months.

During the past twelve months, on a not seasonally adjusted basis, the CPI rose by 5.0% in March, following a 6.0% increase in February. This was the slowest annual gain since May 2021. The “core” CPI increased by 5.6% over the past twelve months, following a 5.5% increase in February. The food index rose by 8.5% while the energy index fell by 6.4% 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 0.1% in March.