The Role of Housing Costs in Driving Persistent US Inflation and the Impact on Renters

Inflation in the United States continues to be a concern, with consumer prices rising 3.2% in February 2024 compared to a year ago, slightly higher than expected. This increase in inflation is raising concerns for the Federal Reserve as it still stands more than a percentage point higher than the central bank's target rate of 2% [c9734e42] [644496f9].

The rise in US inflation to 3.2% highlights the 'last mile' challenge for the Federal Reserve. The inflation rate exceeded the Fed's target of 2% and raised concerns about the central bank's ability to control inflation. The increase in inflation was driven by rising energy and food prices, as well as supply chain disruptions. The Fed is facing pressure to tighten monetary policy and raise interest rates to curb inflation, but it must also consider the potential impact on the economy and employment. The central bank is expected to take a gradual approach to tightening and monitor economic data closely. The rise in inflation comes as the US economy continues to recover from the impact of the COVID-19 pandemic [0d4d68e5] [c9734e42] [644496f9].

Underlying US inflation topped forecasts for a second month in February as prices jumped for used cars, air travel, and clothes. The so-called core consumer price index (CPI), which excludes food and energy costs, increased 0.4% from January, according to government data. From a year ago, it advanced 3.8%. Core CPI over the past three months rose an annualized 4.2%, the most since June [15421659].

The rise in inflation was driven by higher prices for petrol, housing, airfare, car insurance, and clothing. Petrol prices rose by 3.8% between January and February, while airline fares rose 3.6%. Gasoline and shelter costs were the primary drivers of the increase, contributing more than 60% to the monthly rise in the consumer price index [09d8bc61] [88700f90] [0159b749] [cf68dfae] [644496f9].

However, 'core' inflation, which excludes volatile prices for food and energy, declined to 3.8% in February, down from 3.9% in January but still above expectations. Some grocery prices, including dairy products and fruits and vegetables, decreased. Grocery prices remained unchanged overall [cf68dfae] [644496f9].

Housing costs, which account for roughly a third of the consumer price index, rose 0.4% over the month and 5.7% from a year ago. Excluding housing costs, the inflation rate in the US is around 1.8% compared to February 2023 [6d9eee75] [0159b749] [644496f9].

Recently released government data shows that a national housing shortage, not broad-based price increases, is driving inflation in the US. Inflation over the past year was 3.1%, driven by the rising cost of shelter, including rent and estimated rent for owner-occupied homes. Most prices, including goods and food, have risen slowly or not at all. Household energy prices are down 2.4%, and the price of cars has fallen just over 1%. However, housing costs have increased at a faster rate than historical rates, adding over $2 trillion to homeowners' balance sheets since the beginning of 2022. This has implications for different generations, with younger people suffering from rising housing costs and missing out on the resulting wealth boom. The solution to housing-fueled inflation is to build and rehabilitate more housing, with estimates putting the nationwide shortfall between 1.5 million and 5.5 million units. Legislation passed by the House in 2022 to address the housing shortage fell short in the Senate. The Biden administration has announced reforms to add tens of thousands of new homes to the market, but more needs to be done to ease and encourage building. The Federal Reserve is focused on fighting inflation, but Congress has yet to address the national housing shortfall [2c19426e] [d0183c57] [96dec3c4].

According to Ben Harris, the vice president and director of the Economic Studies Program at the Brookings Institution and a former economic adviser to President Joe Biden, the national housing shortage, not broad-based price increases, is driving inflation in the US. Inflation over the past year was 3.1%, with the rising cost of shelter, including rent and estimated rent for owner-occupied homes, being the main driver. Most prices, including goods and food, have risen slowly or not at all. Inflation for everything other than housing was just 1.5%. The housing costs have increased at a faster rate than historical rates, adding over $2 trillion to homeowners' balance sheets since the beginning of 2022. This has implications for different generations, with younger people suffering from rising housing costs and missing out on the wealth boom. The remedy for housing-fueled inflation is to build and rehabilitate more housing, with estimates putting the nationwide shortfall between 1.5 million and 5.5 million units. Legislation passed by the House in 2022 to allocate $40 billion to supply-boosting programs fell short in the Senate. The Biden administration has announced reforms to add tens of thousands of new homes to the market, but more needs to be done. Congress has yet to help by addressing the national housing shortfall, while the Federal Reserve is committed to fighting inflation [54088d98] [d46b810d].

A recent article by Benjamin Thernstrom on PBS NewsHour highlights the ongoing issue of high rents in the United States. Rents today are well above pre-pandemic levels, and many renters are paying more than a third of their income towards rent. Diane Yentel, CEO of the National Low Income Housing Coalition, emphasizes the need for federal intervention to address the cost of housing. Housing prices are a critical concern for voters, and the federal government should take action to alleviate the rent crisis and the housing crisis. The article raises questions about the best way to address the housing crisis and the impact it has on renters [8311942b].

The persistent rise in housing costs poses a challenge for the Federal Reserve as it aims to bring inflation back to its 2% target. The shelter component, which constitutes about one-third of the Consumer Price Index (CPI), remains a major driver of inflationary pressures. Federal Reserve Chair Jerome Powell acknowledged the difficulties in addressing inflationary pressures, noting that the Fed's confidence in inflation easing has diminished. The lag in CPI data reflecting real-time rental market conditions complicates policy decisions. Despite cooling rents in some areas, the CPI may continue to show rising shelter costs due to the methodology used in calculating the shelter component. The persistence of high housing costs is a burden on American households, as elevated mortgage rates have priced many potential homebuyers out of the market, increasing demand for rentals. As the Fed continues to navigate its path to bring inflation to its target, the outlook remains uncertain. The challenge of balancing efforts to control inflation while addressing the persistent rise in housing costs will continue to shape the economic landscape [06508654].