The primary factor fueling inflation currently lies in the realm of housing costs.
Despite their recent move to Lake Mills, Wisconsin, Kataska and her husband have discovered that the dream home they thought they could afford might cost more than they initially anticipated. "We're still in the early stages, but it turns out the type of house I thought was within our budget is significantly more expensive than what we can actually manage," Kataska shared.
The escalating housing prices across the nation are putting a considerable strain on house hunters, with shelter inflation, or the average cost of housing in the US, reaching 4.8% year-over-year in December 2024, as reported by the recent Consumer Price Index (CPI). This major contributor to overall inflation has hindered the broader inflation rate from dropping back down to the Federal Reserve's desired target of 2%.
In the wake of the Fed's September 2024 interest rate cut, some experts anticipated a win against historic inflation. However, the CPI and Personal Consumption Expenditures (PCE) price index have persistently remained at elevated levels since then. Economists predict that January's CPI will reveal no change from the previous month's 2.9% annual increase, as well as a core CPI of 3.1%.
Fed Chair Jerome Powell has indicated that housing represents the "majority of the remaining gap" in the inflation struggle. To better understand this housing-driven inflation, it's essential to look at CPI's peculiar approach to housing inflation measurements, which take into account both rented and owned residences.
Inflation in rent tends to be slower in both direction, as many individuals sign rental agreements with fixed rates lasting from 1 to 2 years. This prolonged impact of increasing rents can cause a ripple effect that maintains persistently high housing inflation, ultimately contributing to overall inflation that remains elevated.
Despite housing inflation impacting the PCE price index at a lower percentage, it still plays a vital role in driving up consumer prices. In the last quarter of 2024, a recent report from the National Association of Realtors revealed that 89% of metro areas recorded a rise in single-family existing home sales prices. This surge can be attributed to elevated mortgage rates, which incentivize homeowners with low fixed-rate mortgages to remain in their homes, reducing inventory availability and further exacerbating rising home prices.
While rental market inflation may have started to level off, as suggested by the median asking rent falling by 0.3% year-over-year in December 2024 to $1,594 (the lowest level since March 2022), Affordability remains an ongoing concern. Several elements, such as the Federal Reserve's interest rate cuts, chronic underbuilding, and policy factors, including broad-based tariffs and mass deportations, could impact overall inflation, including housing inflation, in the future.
In a much-awaited slowdown, housing inflation is finally showing signs of abating, according to some experts. However, this doesn't necessarily mean that the Fed's battle against inflation has been fully won.
The current housing inflation, significantly affecting the economy, has made it challenging for businesses like Kataska's to afford their dream homes. High housing prices across the nation, with shelter inflation reaching 4.8% year-over-year, are putting a strain on house hunters.
