“The only thing missing” in the favorable impression of the CPI

May's consumer price index contained a consistently frustrating piece of data for economists in an otherwise encouraging report: Housing inflation is not yet falling.

Wednesday's data from the Bureau of Labor Statistics showed housing costs rose 0.4% month over month over the last four CPI printings. Housing costs remained the largest contributor to the core CPI, which rose 0.2% in May.

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Overall, markets welcomed the report, which showed that headline inflation has slowed on a monthly and annual basis.

“The only thing missing from today's report for the Fed is further moderation in rents and landlords' equivalent rents, which changed little over the month,” wrote Stephen Juneau, U.S. economist at Bank of America. America, in a note after the data was released. .

Rent and landlord equivalent rent each increased by 0.4% on a monthly basis in May, matching April's increases. Landlord equivalent rent is the hypothetical rent a landlord would pay for the same property.

Juneau added, “That said, market rent metrics continue to suggest that a moderation in these positions is underway.”

Economists have expected the slowdown in rent increases to be reflected in the CPI for more than a year. BLS surveys release data every six months, causing a lag in the index.

“We are still waiting for further moderation in housing rents,” said Bernard Yaros, chief U.S. economist at Oxford Economics. “We are confident that the housing rent CPI will eventually decline, given rising rental vacancy rates, but the timing is still uncertain.”

Federal Reserve Chairman Jerome Powell echoed this sentiment.

“I'm confident that as long as market rents remain low, that will result in measured inflation, assuming market rents remain low,” Powell said at a news conference in May.

Certainly, housing inflation eased on an annual basis in May. Housing costs rose 5.4% from a year earlier, the slowest annual rise since April 2022 and lower than their peak of 8.2% in March of the previous year.

One of the main factors contributing to the moderation in rent growth has been the addition of new apartments to the market. Economists at Goldman Sachs expect headline housing inflation to run at a monthly pace of around 0.34% through December of this year.

But some industry experts say there are downside risks that could reaccelerate rents, posing another inflationary hurdle for the Federal Reserve.

“The big challenge is one that they are very aware of, which is that the longer rates stay high, the harder it is to continue to provide the one solution that has brought down rent inflation, which is greater supply of housing,” Jay said. Parsons, head of investment strategy at Texas-based apartment owner Madera Residential, told Yahoo Finance in an interview.

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Builders have already faced rising costs, leading to a slowdown in construction activity. In fact, multifamily permits have declined sharply since the Fed's hiking cycle began, “which means that by the second half of '25 and '26, we may suddenly have a lot less supply in the market,” Parsons said. “A decrease in housing construction could eventually give way to another rise in rents in a few years,” Parsons said.

The single-family rental market also felt the brunt of rising rates.

“There aren't a lot of new single-family rentals coming into the market,” Parker Ross, global chief economist at Arch Capital Group, told Yahoo Finance. “You will exacerbate the shortage of supply by keeping prices high and, on the contrary, cause an increase in owner-equivalent rents.”

Dani Romero is a journalist for Yahoo Finance. Follow her on Twitter @daniromerotv.

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