Why Housing Inflation is Likely to Fall Soon

June 15, 2023

Housing is one of the most influential components of the consumer-price index (CPI), a key gauge of inflation. Housing is the largest monthly expense for the average U.S. household, and shelter costs account for more than one-third of the CPI weighting, more than any other consumer good or service.

Housing inflation has been persistently high for months. The latest CPI report showed that shelter costs climbed 0.6% in May from the month before, an acceleration from April’s 0.4% month-to-month increase. Economists believe, however, that housing inflation has peaked and is due for a rapid decline.

Inflation for housing costs was relatively muted in the period before the pandemic, but housing costs surged during the pandemic as changing workplace dynamics led to buying frenzy. Since then, housing costs have slowed their growth and even started to fall in some regions. 

The average rent grew by 4.8% in May from a year earlier, according to the Zillow Observed Rent Index. That is a significant slowdown from the 15.7% annual increase seen this time last year.

The problem, however, is that CPI doesn’t capture these price trends in real-time. The Bureau of Labor Statistics, which produces the CPI, only collects rent data from sample households every six months, on a staggered basis. The households are divided into six subgroups, or “panels,” with data from Panel 1 collected in January and July, Panel 2 collected in February and August, and so on. This creates a substantial delay in CPI calculation, making the index appear outdated compared to other measures of housing costs. As the lagged data begins to capture the more recent downturn in housing costs, economists expect CPI to continue declining.


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