The Consumer Price Index (CPI) report recently released highlights the ongoing impact of shelter costs on the persistent inflation in the United States.

Tiffany Wilding, a managing director and economist from Pimco, provides insights into this crucial factor.

According to Wilding, the moderation of shelter inflation has been slower than anticipated.

The Bureau of Labor Statistics (BLS) measures rents by considering not only new leases, but also pre-existing rental units.

While market rents may be experiencing a slight decline, the average rent across the entire rental stock remains below market levels.

Landlords are gradually raising rents of existing tenants, contributing to the stickiness of shelter inflation.

This is occurring despite the deceleration of market rents, particularly in the Sun Belt region.

The vast majority of rental units in the country still have below-market rents, thus accounting for the continued upward pressure on shelter costs.

Wilding anticipates that shelter inflation will continue to moderate year-over-year, but suggests it may settle at levels higher than pre-pandemic inflation rates.

This is driven by a shortage of housing supply, a problem exacerbated by underbuilding since the Great Financial Crisis.

The supply-demand dynamics in the rental market vary depending on the type of property.

Single-family homes, often located in suburban areas, are seeing stronger demand and higher rents.

Conversely, multifamily structures, particularly in mid-sized cities, are experiencing oversupply and discounted rents.

However, this weakness in multifamily rentals is not significantly affecting the overall rental market, as measured by the BLS.

In summary, shelter costs remain a substantial contributor to inflation and are expected to remain elevated in the near future.

The limited supply of housing, particularly single-family homes, coupled with the gradual adjustment of existing rents, indicates that a sustained return to pre-pandemic inflation levels is unlikely without a significant weakening in the labor market.

Shelter Costs Drive Inflation

Rent increases, particularly for existing tenants, continue to contribute significantly to inflation, despite a slowdown in market rents.

Housing Supply Shortage Raises Shelter Costs

A lack of housing supply, especially single-family homes, exacerbates inflation as demand outpaces supply.

Slow Moderation of Shelter Inflation

Shelter inflation is anticipated to moderate gradually but may not reach pre-pandemic levels due to supply-demand imbalances.