Housing has a prominent role to play within the consumer price index, which is one of the most significant inflation indicators. As shelter is the most expensive cost for the average American household, it accounts for over a third of the CPI weight, providing it with a disproportionate impact on inflation data. For many months, CPI data showed that housing inflation remained stubbornly high. However, economists are optimistic that it is about to peak and make a reversal.
Mark Zandi, the Chief Economist at Moody’s Analytics, said he is confident that falling housing inflation will soon occur. Before the pandemic, the Consumer Price Index’s “shelter” price fluctuations were generally muted. Still, COVID-19 changed that dynamic, leading to a significant increase in housing costs that have since slowed and started to fall in certain regions, according to economists.
Zillow’s Observed Rent Index data shows that Americans saw rents rise by 4.8% to an average of $2,048 per month nationally in May, a considerable slowdown from the 15.7% growth in the preceding year, from May 2021-June 2022.
Despite the decline in CPI housing inflation, there are limitations to the CPI’s accuracy as a gauge for housing trends. The CPI operates with a substantial lag, which can take six months to a year for a decline or increase in current housing prices to fully feed through to inflation data. It collects rent data from sample households every six months, divided into six subgroups. It can, therefore, take a year or more to collect data from all subgroups, placing limitations on its accuracy. Economists predict that housing inflation will decline soon, and Capital Economics’ Deputy Chief US Economist, Andrew Hunter, previously stated that the BLS’s CPI is not necessarily an accurate representation of the current housing market.
Another measuring quirk is the BLS’s attempt to assess the price changes for homeowners and renters in a subcategory called “owners’ equivalent rent.” The measure reflects the price homeowners believe they could receive if they rented their homes and is essentially a survey somewhat tied to market rents. Homeowners, particularly those with fixed mortgages or who own their homes, are not necessarily subject to inflationary pressures.
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