Housing costs are easing.
But not easing enough to rule out concerns about boomerang inflation, economists say.
February’s CPI rose 0.4% over January and 3.2% over the prior year, slightly higher than January's 0.3% monthly and 3.1% annual increases.
Despite that overall acceleration, February's shelter component, which is mostly made up of rent and homeowners' equivalent rent (OER), saw a lower monthly increase of 0.4%, down from January’s 0.6% gain.
On a yearly basis, shelter continues to moderate as well. February's annual gains came in at 5.7% — lower than January’s 6% year-over-year figure, and now the 11th straight month of decline from March 2023's peak of 8.2%.
This is all clearly progress in the right direction, but as the Bureau of Labor Statistics said Tuesday, shelter costs still remain “the largest factor in the monthly increase in the index for all items less food and energy.”
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Brad Case, chief economist at Middleburg Communities, told Yahoo Finance that it was yet another neutral report, neither good nor bad.
“The rent component of CPI is coming down at the pace that we expected," Case said. "The problem is simply that it's so slow to fall and that keeps the overall inflation rate high.”
Shelter costs account for two-thirds of February's overall monthly gain in all items less food and energy.
It's not enough to be on the right path, but that path needs to be "fast enough to prevent concerns about inflation reigniting," Case added.
In anticipation of February's inflation report, Federal Reserve Chair Jerome Powell told lawmakers last week that the central bank was “not far” from gaining enough confidence in declining inflation to reduce rates. This also coincides with economists’ expectations that housing costs will continue to move lower.
Sarah House, managing director and senior economist at Wells Fargo, told Yahoo Finance that she expects the shelter inflation to "bottom out spring of next year based on the rate we're going."
But the rent measure doesn't fully capture what's happening currently in the rental market as the BLS surveys its groups every six months, causing a lag in the index. The tight housing market remains an issue.
“The average level of rents paid is still well below the market rate, and there is an undersupply of single-family detached housing at a time when the relative unaffordability of buying a home is pushing families into the rental market," Tiffany Wilding, a PIMCO economist, wrote in a note to clients in February.
Powell warned the Senate Banking Committee last week about the issue as he believes the housing market will remain undersupplied for years to come.
“There are a ton of things happening because of the pandemic and because of inflation, because of higher rates, and those in the short-term are weighing on the housing market,” Powell said. “But as [mortgage] rates come down, and that all goes through the economy, we’re still going to be back to a place where we don’t have enough housing.”
“All of this supports the argument that the Fed likely faces a 'last mile' problem. The relatively painless disinflation of 2023 is likely to become a slower, more nuanced process in 2024,” Wilding wrote. “This risks delaying the start of Fed cuts or the Fed cutting more slowly than the market currently expects.”
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Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.
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