While inflation remains well above the Federal Reserve’s target rate of 2%, consumer prices in March posted its smallest year-over-year increase since May 2021. The Bureau of Labor Statistics reported the Consumer Price Index (CPI) rose 0.1% in March, the ninth consecutive month of deceleration. The shelter index, including housing inflation, also reported its smallest monthly gain since November 2022, according to an analysis by the NAHB.
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.
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. Nonetheless, the NAHB forecast expects to see shelter costs decline later in 2023.
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.
