Stubbornly High Housing Costs Keeps Inflation Elevated

December 12, 2023

U.S. consumer prices saw an unexpected increase last month, as a decline in gas prices was offset by increases in rent, keeping pressure on the Federal Reserve to keep rates elevated.

The consumer price index (CPI), a closely watched inflation gauge, increased 0.1% in November from the month prior and was up 3.1% from a year ago, according to the Labor Department. Economists surveyed by Dow Jones had been expecting no gain for the month.

November’s monthly gain represents a small uptick from October, when inflation held steady, while the annual gain is a slowdown from October’s 3.2% annual increase.

Core inflation, which excludes volatile components like food and energy and is believed by economists to be a better indicator of long-term trends, increased 0.3% for the month, faster than would be consistent with the Fed’s 2% inflation target. Core inflation was up 4% in November as compared to a year earlier, the same as in October.

The somewhat tepid report is unlikely to sway the Fed’s actions at its policy meeting this week, where it is widely expected that the central bank will hold rates steady. The Fed is likely to point at the progress made in combatting inflation this year. Core inflation over the past six months was at an annualized rate of 2.9% in November, down significantly from the 5.1% seen in the six months before that.

A 2.3% decline in energy costs, led by a 6% drop in gas prices, helped keep the headline inflation numbers in check for the month, but food prices continue to climb, jumping 0.2% for the month. On an annual basis, food costs are up 2.9% while energy is down 5.4%.

The biggest influence on the Fed’s thinking in the coming months is likely to be housing costs. Shelter, which accounts for roughly one-third of the CPI calculations, rose 0.4% last month and 6.5% over the past year. That is down from levels seen earlier in the year, but much higher than the Fed would like. Recent data from Zillow shows that annual increases in rent have slowed to pre-pandemic levels, but the arcane way that CPI calculates shelter costs means it could be months before the slowdown begins to show up in the CPI.

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