Despite efforts to address it, housing inflation remains persistently high.

• The Federal Reserve's target for the consumer price index cannot be achieved due to the high shelter inflation index.
• Despite a decrease in inflation for market rents, the CPI shelter index remains high.
• The Bureau of Labor Statistics constructs its housing inflation index differently.

Despite a decrease in overall U.S. economy inflation, housing inflation persists.

The slow decline is the main obstacle preventing the consumer price index from reaching policymakers' target, economists stated.

According to Joe Seydl, senior markets economist at J.P. Morgan Private Bank, we view it as the final step before CPI normalizes.

Since housing is the largest expense for the average household, it accounts for 36% of the CPI index. As a result, changes in shelter prices have a significant impact on inflation readings.

The National Association of Realtors' deputy chief economist, Jessica Lautz, stated that "shelter inflation" is a gauge of U.S. rental prices at a high level.

The Bureau of Labor Statistics' calculation of shelter prices does not accurately reflect real-time rental market trends.

Why CPI shelter inflation has fallen slowly

The pullback in shelter inflation has been slower than expected, economists said.

In June 2024, the annual rate of inflation fell from around 8% in early 2023 to 5.2%, according to CPI data. Currently, its level is about 2 percentage points above its pre-pandemic baseline.

"The progress of [Shelter] has been slower than expected, according to North America economist Olivia Cross at Capital Economics, who stated, 'It's just moving in the right direction.'"

The current state of the rental market may appear to contradict the dynamic of the rental market.

In the first quarter of the year, the annual inflation rate for new rental contracts has decreased to 0.4%, which is lower than its pre-pandemic baseline and significantly lower than the record highs of around 12% seen just two years earlier, according to BLS data.

The answer to whether inflation is Biden's or Trump's fault is not straightforward. Despite inflation cooling, more Americans are still facing financial difficulties. On average, homeowners spend approximately $55,000, according to a recent report.

The reason for the glacial pace of the shelter's CPI data is mainly due to how the federal government constructs its housing inflation index, according to economists.

Changes in shelter CPI readings are delayed relative to those in the current rental market due to the government's methodology.

Jerome Powell, the Federal Reserve Chair, stated in June that there are significant delays in the rental market's reflection in the shelter CPI readings. It may take "several years" for the readings to accurately reflect recent rental market trends.

CoreLogic's chief economist, Selma Hepp, stated that the Federal Reserve is fully aware of the concern surrounding the shelter delay and takes it into account when making decisions about inflation.

How the CPI reflects homeownership

According to J.P. Morgan's Seydl, the shelter inflation index gauges the average cost of housing in the U.S. economy by considering two key factors: rent and "owners' equivalent rent of residences."

Determining changes in monthly rental expenses for tenants is straightforward.

For most Americans who own homes, calculating the value of their investments is more complex, as the Bureau of Labor Statistics classifies owned housing units as investments rather than goods that are consumed.

Homeowners' regular expenses, such as a mortgage, property taxes, real estate fees, most maintenance, and all improvement costs, are classified as "capital" costs rather than consumption. These expenses do not fit easily into the CPI basket, which measures changes in the prices of goods and services that Americans consume.

According to the NAR's Lautz, the term "shelter" in relation to the CPI does not refer to the cost of purchasing homes.

The BLS employs the "owners' equivalent rent" (OER) classification to ensure that homeowners are treated equally with renters. This measure assesses the "worth of the homeowner's rental income if they had rented out their property instead of using it personally," as stated by the BLS.

The BLS has used this framework since 1987, the agency said.

According to Powell, many countries worldwide assess inflation by imputing a rental value to owned homes.

How the BLS constructs the shelter index

The government constructs its CPI shelter index by sampling a "staggered panel" of renters and homeowners, according to Seydl.

The shelter index aggregates price changes by surveying six groups of houses on a staggered basis every six months.

Due to the staggered nature of the data, the index moves slowly and with a lag, economists said.

CoreLogic's Hepp stated that the trends observed in the CPI data have already been experienced in the previous nine to twelve months.

Experts suggest that shelter inflation should remain moderate as it aligns with the trend in new rental contracts and as more rental units become available.

Hepp stated that we will observe a slowing or deceleration in the rent component.

Due to the pandemic, rental prices rose because demand exceeded supply, resulting in a surge in rental prices, she stated.

""The slowing of rent growth can be attributed to the increased construction of multifamily units, which is meeting the previously tight demand," Lautz stated."