Inflation continued its pace of deceleration in June, with consumer prices posting their smallest year-over-year gain since March 2021. Housing inflation continues to be the largest contributor to both headline and core inflation, though, and is accounting for over 70% of the increase in headline inflation, according to an analysis by the NAHB.

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 further later in 2023, supported by real-time data from private data providers that indicate a cooling in rent growth.

The Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) rose by 0.2% in June on a seasonally adjusted basis, following an increase of 0.1% in May.

The index for shelter, which makes up more than 40% of the “core” CPI, rose by 0.4% in June, following an increase of 0.6% in May. The indexes for owners’ equivalent rent (OER) increased by 0.4% and rent of primary residence (RPR) increased by 0.5% over the month. Monthly increases in OER have averaged 0.6% over the last six months. These gains have been the largest contributors to headline inflation in recent months.

During the past 12 months, on a not seasonally adjusted basis, the CPI rose by 3.0% in June, following a 4.0% increase in May. This was the slowest annual gain since March 2021. The “core” CPI increased by 4.8% over the past 12 months, following a 5.3% increase in May. The food index rose by 5.7% while the energy index fell by 16.7% over the past 12 months.