Consumer prices decelerated for the seventh consecutive month in January, growing on the smallest year-over-year basis since October 2021. The NAHB says the disinflation pace “was much slower than expected,” in part because a new methodology for inflation introduced higher weights for shelter and lower weights for food and energy to reflect changes in consumer spending in 2021.
The shelter index (housing inflation) continued to rise at an accelerated pace and was the largest contributor to the total increase. Shelter inflation will primarily be cooled in the future via additional housing supply. While inflation appears to have peaked and continues to slow, inflation in core service (excluding shelter) has not begun to ease.
The Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) rose by 0.5% in January on a seasonally adjusted basis, following an increase of 0.1% in December. The price index for a broad set of energy sources grew by 2.0% in January as the gasoline index (+2.4%), the natural gas index (+6.7%) and the electricity index (+0.5%) all increased.
The index for shelter, which makes up more than 40% of the “core” CPI, rose by 0.7% in January, following an increase of 0.8% in December. Both the indexes for owners’ equivalent rent (OER) and rent of primary residence (RPR) increased by 0.7% over the month. Monthly increases in OER have averaged 0.7% over the last three months. These gains have been the largest contributors to headline inflation in recent months. These higher housing costs are driven by lack of attainable supply and higher development costs. Higher interest rates will not slow these costs, which means the Fed’s tools are limited in addressing shelter inflation.
