Core inflation remained sticky in July, ending a streak of 12 months of steady declines. Despite the month-over-month slowdown, the shelter index—housing inflation—continued to be the largest contributor to inflation, accounting for over 90% 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. This can be seen on the graph below, as shelter costs continue to rise despite Fed policy tightening. 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 July on a seasonally adjusted basis, the same increase as in June.
In July, the indexes for shelter (+0.4%) and motor vehicle insurance (2.0%) were the largest contributors to the increase in the headline CPI. Meanwhile, the indexes for airline fares (-8.1%), used car and trucks (-1.3%) as well as communication (-0.1%) declined in July.
