Inflation increased for the second consecutive month in August, including the largest monthly gain in consumer prices since June 2022. According to the Bureau of Labor Statistics (BLS), the Consumer Price Index (CPI) rose by 0.6% in August. Shelter costs remained high and were the second-largest contributor to the increase in inflation.
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 index for shelter, which makes up more than 40% of the “core” CPI, rose by 0.3% in August, following an increase of 0.4% in July. 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 0.5% over the last eight months. These gains have been the largest contributors to headline inflation in recent months.
During the past twelve months, on a not seasonally adjusted basis, the CPI rose by 3.7% in August, following a 3.2% increase in July. The “core” CPI increased by 4.3% over the past twelve months, following a 4.7% increase in July. This was the slowest annual gain since October 2021. The food index rose by 4.3% while the energy index fell by 3.6% over the past twelve months.
