Housing costs are a big driver of inflation — for now

Housing costs were by far the largest reason behind July's inflation, but that may soon moderate when the measure finally reflects cooling rental prices.

The shelter component of the July Consumer Price Index (CPI) — which makes up a third of the overall CPI index — rose 0.4% over the month, the same increase as in June. On a yearly basis, the component increased 7.7% in July.

The shelter index was the largest contributor to overall inflation, which rose 0.2% in July, accounting for an over 90% increase for all items, according to the Bureau of Labor Statistics report out Thursday.

The index for housing costs, though, doesn't reflect what's happening on the ground now for consumers because the data it uses is a backward-looking indicator rather than a real-time one.

"Though shelter inflation is sticky, the CPI lags market rents by roughly a year. Therefore, we know that the CPI for shelter is set to moderate noticeably through the remainder of this year," Ryan Sweet, chief US economist at Oxford Economics, wrote in a note following the release.

The shelter index consists of rent prices, which increased 0.4% from June, and what it would cost a homeowner to rent an equivalent residence — known as owners' equivalent rent — which advanced 0.5% over the last month.

"We're clearly past peak inflation on the housing front with shelter cost inflation showing a gentle easing from 8.2% year over year in March to 7.7% year over year in July," EY-Parthenon senior economist Lydia Boussour wrote. "Housing disinflation will pick up momentum in the coming months."

For instance, Zillow reported that the typical asking rent nationwide increased 3.6% over a year ago, "continuing a steady, 17-month-long slowdown in the annual growth rate since hitting a record-high 16.2% in February 2022."

That trend echoes data from RealPage Market Analytics, which showed an even cooler year-over-year rate of rent growth below 1%, the lowest since July 2010 and signaling a potential drop into negative territory over the next months.

A lot of the deceleration has to do with more rental supply coming onto the market.

"We continue to see apartment demand bounding back nicely after a weak 2022. But we’re also seeing a multi-decade high in new supply," Jay Parsons, chief economist for RealPage, wrote in a note. "So supply is doing what it's supposed to do – putting downward pressure on pricing."

A for-rent sign is placed in front of a home in Arlington, Va., on June 8, 2021.
A for-rent sign is placed in front of a home in Arlington, Va., on June 8, 2021. The shelter index was the largest contributor to overall inflation, accounting for an over 90% increase for all items, according to the BLS report Thursday. REUTERS/Will Dunham · Will Dunham / reuters

Eventually, though, the year-over-year comparisons won't be as favorable, Parsons noted.