Both headline and core inflation continued to slow in June as lower gasoline prices offset rising housing costs, another dovish signal for future monetary policy following a big downward revision in the employment data.
Despite a slowdown in year-over-year growth, housing costs continue to drive up inflation, accounting for more than 60% of the overall increase in core inflation. While the report shows signs of softening prices, the Fed needs more data to confirm a consistent de-inflation trend toward its 2% target before considering cutting interest rates.
The Fed's ability to address rising home prices is limited because rising home prices are driven by a lack of affordable housing supply and rising development costs. The primary solution to curbing home price growth is to add more housing. However, the Fed's tools to stimulate housing supply are limited.
In fact, further tightening of monetary policy would adversely affect housing supply by increasing the cost of AD&C financing. This can be seen in the chart below, as housing costs continue to rise despite the Fed's tightening of monetary policy. That said, NAHB forecasts call for further declines in housing costs in the coming months, which is supported by real-time data from private data providers, which show rent increases slowing.
The Bureau of Labor Statistics said the Consumer Price Index (CPI) fell 0.1% on a seasonally adjusted basis in June after being flat in May, the first monthly decline since May 2020. The “core” CPI, which excludes volatile food and energy items, rose 0.1% in June after increasing 0.2% in May.
The Energy Price Index fell 2.0% in June, mainly due to a 3.8% drop in the gasoline price index. Other energy price indexes such as electricity and fuel oil fell 0.7% and 2.4%, respectively, but the natural gas price index rose 2.4%. Meanwhile, the Food Price Index rose 0.2%, following a 0.1% increase in May. The Eating Out Price Index rose 0.4%, and the Meal at Home Price Index rose 0.1%.
The Housing Index (+0.2%) continued to be the largest contributor to the core CPI's monthly increase in June. Other major indexes that increased in June included Auto Insurance (+0.9%), Home Furnishings & Equipment (+0.5%), and Health Care (+0.2%). Meanwhile, major indexes that decreased in June included Airfares (-5.0%), Used Cars & Trucks (-1.5%), and Communications (-0.2%).
The housing index accounts for over 40% of the “core” CPI. The housing index increased 0.2%, remaining the largest contributor to the monthly increase in the core inflation index. The Owner's Equivalent Rent (OER) and Principal Residence Rent (RPR) indexes both increased 0.3% month-on-month, their smallest monthly increases since August 2021. These increases have been the largest contributors to headline inflation in recent months.
Over the past 12 months, the CPI, not seasonally adjusted, increased 3.0% in June, following a 3.3% increase in May. The “core” CPI increased 3.3% over the past 12 months, following a 3.4% increase in May. This was the slowest annual rate of increase since April 2021. Over the past 12 months, the food index increased 2.2% and the energy index increased 1.0%. This marks the fourth consecutive month since February 2023 that the energy index has increased year-over-year.
NAHB creates a “real” rent index that indicates whether rent inflation is rising faster or slower than overall inflation, which provides insight into the supply and demand situation for rental housing. When rent inflation rises faster than overall inflation, the real rent index rises and vice versa. The real rent index is calculated by dividing the rent price index by the core CPI (which excludes the more volatile food and energy components).
The real rent index increased by 0.2% in June, following a 0.2% increase in May. Monthly growth in the real rent index for the first six months of 2024 averaged 0.1%, lower than the 2023 average of 0.2%.
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