Once again, housing costs were the biggest contributor to inflation, according to data released Tuesday by the Bureau of Labor Statistics.
The overall shelter costs were up 8% from a year ago and rent inflation stood at 8.7%, according to the Consumer Price Index report, which also shows that annual increase in inflation has fallen for the 11th straight month and is now at the lowest level in more than two years.
If rent inflation sounds high, particularly if you have been paying attention to private-sector indexes such as Redfin, Rent.com or Zillow which show a softening, there’s a reason for that.
Nationwide, rents declined 1% from a year earlier in May−the largest drop since 2020−as a building boom increased supply and economic uncertainty cooled demand, according to Redfin.
Why is there a disconnect between current rents and CPI shelter costs?
The bureau measures changes in the cost of housing for both renters and homeowners as well as lodging away from home and tenants’ and household insurance. But the cost to rent a primary residence is weighted the most.
If a housing unit is occupied by the owners, the bureau computes what it would cost the owner to rent a similar place, known as Owners’ Equivalent Rent (OER). The CPI program collects rent data from each rental unit every six months since rents are locked in place for a given lease term. It also allows for a larger sample, according to the BLS.
However, in a fast changing, volatile housing market, that measure can seem outdated compared to private indexes that look at current leases.
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Will rents continue to go down? (even if according to CPI report, it’s going up?)
“At the beginning of this year, landlords were beginning to drop rents. And that means that leases that are coming online now in June, for example, would reflect those lower rents. If rents indeed are coming down in a systematic way, we should see that reflected in the CPI as we head through the summer,” says Bright MLS Economist Lisa Sturtevant.
Still, there’s a chance rents may not drop by much.“As the economy has been changing and landlords have been sort of reevaluating, we may see them keeping rents firmer than we thought they would, because of this increased demand for rental units,” she says.
Will mortgage rates be affected by Fed’s rate decision?
While the initial few rate hikes last year saw mortgage rates doubling, the past few hikes have had very little impact on mortgage rates.
“Each month when the Federal Reserve has raised rates most of the time the mortgage market has already baked in those rate increases because it’s been very clear what the Federal Reserve had intended to do,” says Sturtevant.
Anything that introduces uncertainty into the economy that causes more of a mortgage rate fluctuation.
“That’s why we saw mortgage rates spike a little bit with the debt ceiling debate when it was unclear whether Congress and the president were going actually sit down and hammer out a deal,” she says.
Still, since the market is expecting a pause tomorrow, any deviation from it can have an effect on mortgages, says Sturtevant.
“If the Federal Reserve pauses rates hikes tomorrow, I think we’re going to continue to see a softening in the 30-year fixed rate mortgage rate that had already been underway,” she says.
But if the Federal Reserve does raise interest rate hikes Wednesday, the reaction would be different.
“I think that might be seen as a surprising move and could send rates bumping higher tomorrow,” she says.
Swapna Venugopal Ramaswamy is a housing and economy correspondent for USA TODAY. You can follow her on Twitter @SwapnaVenugopal and sign up for our Daily Money newsletter here.