Shelter costs remain a sticking point for inflation

Multiple measures of inflation are reported regularly. We know the Fed focuses on “core” measures of inflation and prefers the core Personal Consumption Expenditures (PCE) to measure inflation. Still, the monthly report on the Consumer Price Index (CPI) carries significant weight and is widely followed by Wall Street.

All the measures of inflation are moving in a similar direction – lower - but how we measure inflation within the different indexes results in some differences between the indexes. Our chart this week focuses on the most recent CPI report and breaks it down to see where the “sticky” parts of inflation reside.  The result is clear: this is primarily a “housing/shelter” related issue.

Breaking out the inflation data to focus on shelter versus everything else shows that absent the shelter component, we are back to the Fed’s 2% target. Does this mean the Fed should lessen or change its focus on getting the overall core index to its 2% target? Probably not, as we know shelter is a primary part of living expenses for the U.S., which cannot be ignored. Shelter is, in fact, the single largest component of the CPI index.

The good news is that the trend in shelter inflation is going in the right direction, and we know there is a lag factor in its reporting. Since real-time rent measures from firms like Zillow have new rents lower than what is reported within CPI currently, we can expect future months to continue to show easing rents. The difficulty is that other parts of the inflation picture might pick up from here, and core services, such as insurance, continue to increase at troublesome rates. While core goods are now at disinflationary levels, new policies on tariffs could reverse some of that trend.

The net effect is that while it still seems the Fed can reduce rates from their current level and will most likely cut by 0.25% at their next meeting, the longer-term outlook for inflation and rates is a bit higher today than it was only a few weeks ago. 2025 promises to be interesting on many levels and the path of inflation, and interest rates, is one such area of interest.

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