Housing costs remained elevated in April, serving as the largest contributor to core inflation's rise last month, but there remain signs that prices are starting to moderate.
The shelter component of the Consumer Price Index, which is mostly made up of rent and homeowners' equivalent rent (OER), rose 0.4% in April, matching March's monthly gain, according to data from the Bureau of Labor Statistics data released Wednesday.
Shelter costs rose 5.5% over the prior year, the slowest annual increase since June 2022 and down from a peak of 8.2% reached in March of last year.
Shelter costs accounted for over two-thirds of the annual increase in "core" inflation, which excludes food and energy prices. Shelter and gas prices accounted for 70% of the rise in headline inflation, which includes all categories, according to the BLS.
Read more: Inflation slowed in April — here’s how that affects your wallet
"Housing remains the key source of our inflation problems but disinflation is still in the pipeline," Ryan Sweet, chief US economist at Oxford Economics, wrote in a note after Wednesday's report.
"More patience than previously thought appears to be needed as the lag between newly signed leases and the shelter component of the CPI have been longer than previously thought."
Apartment rents have moderated more quickly than the CPI indicates, and economists have long anticipated inflation data to factor in those numbers. The BLS collects rent data every six months, creating a lag between effective new rents and measured rent inflation.
Read more: Should you rent or buy a home? How to decide.
Chicago Fed president Austan Goolsbee said during a meeting at the Economic Club of Minnesota this month that housing inflation "remains a significant puzzle and challenge.
"We've been saying for some significant time that housing inflation is about to come down. If that happens at the rate at which we think, I think we will start to see overall improvement and it will be fairly clear that there's an optimistic lane that we could ride overall inflation back toward 2%," Goolsbee added.
Omair Sharif, founder of research firm Inflation Insights, called housing costs the "most encouraging aspect of this report" in an email on Wednesday.
Sharif called the 0.3% monthly rent increase a number "that resembles the pre-Covid days."
Oren Klachkin, Nationwide's financial market economist, told Yahoo Finance ahead of the release that COVID-related impacts and a softer economy will see shelter's impact on overall inflation bottom out early next year.
"Those two factors will help lower shelter inflation toward an underlying pace that is more within the line of what we saw in 2018 and 2019," which was around 2.5% to 3%, Klachkin said.
One of the main reasons market rents have moderated is the record amount of new apartment supply added.
However, some industry experts see a scenario where rents could accelerate again, creating another inflation challenge for a Fed that has been counting on housing costs to come down.
"The reason for that, quite ironically, is that as rates have gone up, it's been much more difficult for developers to build more apartments," Jay Parsons, head of residential strategy at Madera Residential, a Texas-based apartment owner, told Yahoo Finance in an interview.
Multifamily "starts have absolutely plummeted,” Parsons added, which, in turn, could lead to “more demand than supply, putting upward pressure on inflation because we're not starting many new housing projects right now."
Rising immigration could be another factor too, with Don Rissmiller at Strategas Research Partners writing in a client note this week, "A pressure point [for inflation] could develop with future rent increases if the housing stock is not sized for increased immigration."
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.
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