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As the biggest expense for an the average American household, shelter accounts for more than a third of the CPI weight, the most of any other consumer good or service. This gives housing an outsized influence on the overall direction of inflation data.
Housing inflation has been stubbornly high for several months, according to CPI data. But economists think it has peaked and is on the verge of a reversal.
“I know this with about as much confidence as one could possibly have,” Mark Zandi, chief economist at Moody’s Analytics, said of falling home inflation looming.
“Shelter” price changes were generally muted before the pandemic, economists said.
For example, Americans saw rents rise 4.8% in May from a year earlier to about $2,048 a month on average nationally. Zillow Observed Rent Index data. This is a significant slowdown from the 15.7% growth during the previous year, from May 2021 to May 2022.
Here’s the problem: CPI doesn’t capture these price trends in real time.
It works substantial delayThat means it could take six months to a year for the decline (or increase) in current housing prices to be fully reflected in inflation data, economists said.
“It’s not necessarily a particularly accurate measure of what’s going on in the housing market right now,” Andrew Hunter, deputy chief U.S. economist at Capital Economics, told CNBC earlier.
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Here’s the reason for the delay: The U.S. Bureau of Labor Statistics collects rent data from selected households every six months. The BLS also divides these sample households into six different subgroups (called “panels”) and staggered data collection for each. According to the BLS, the rent for Panel 1 is collected in January and July; Panel 2, in February and August, and so on.
This means that it may take about a year to collect data from all subgroups.
“Shelter still plays a big role in inflation, but it should slow down in the second half of the year,” said Jason Furman, a Harvard University economist and former chairman of the White House Council of Economic Advisers under the Obama administration. he wrote Tuesday on Twitter.
The latest CPI figure, released on Tuesday, showed a monthly rise in headline inflation to 0.6% in May from 0.4% in April. The most recent figure is on par with the monthly figure a year earlier, in May 2022.
But a decline in housing CPI inflation is “about as certain as you can really get,” Hunter said.
There is another measurement quirk in relation to housing inflation: The BLS tries to assess price changes for both homeowners and renters in a subcategory called “equivalent rent for owners.”
The measure partially reflects the amount a homeowner would pay in rent to live in a unit, assuming it were rented instead of owned. It also includes data from the Home Owners Survey, which reflects the price homeowners think they could get if they rented out their home.
While homeowners are somewhat tied to market rents, they don’t necessarily feel these inflationary pressures – especially those who have a fixed mortgage (meaning their monthly payment doesn’t change) or own their home (meaning they don’t have a down payment housing), said Zandi.