The most important sign that US inflation may stay down for good

Thursday’s US inflation report — which showed consumer prices fall slightly in June — was mostly good news across the board. But in the eyes of Washington and Wall Street, the most important data point of all may have been the cost of housing, which saw a sharp, long-awaited slowdown, potentially signaling a longer-term easing of price pressures.

The numbers “should give you much greater confidence that future inflation prints will be much more moderate and more like pre-pandemic numbers,” said economist Omair Sharif, the founder and president of Inflation Insights.

Fast-rising housing costs have been the single biggest driver of inflation over the past 12 months, contributing 62% of the Consumer Price Index’s increase. Economists widely expected that shelter prices would begin to tail off at some point this year, because the government’s official numbers tend to follow behind market rents on new leases, which long ago began to cool. But they failed to decelerate during the winter and spring — forcing the Federal Reserve to push off plans for interest rate cuts.

June finally delivered the relief everyone had been waiting for. Measured at an annualized rate, shelter inflation plunged to 2.1% last month from 4.9% in May. The current rate is now on par with 2019.

Could this be a one-off fluke? Probably not, according to Sharif, who told Semafor there are at least a couple reasons to think housing inflation could stay subdued going forward.

First, the New Tenant Rent Index created by the Federal Reserve Bank of Cleveland, which tends to run ahead of the official housing inflation data by about one quarter, has been showing slowing price increases.

Second, the decline in shelter inflation might not have really been as sudden as Thursday’s CPI report made it appear. Much of the change resulted from a hard dropoff in what’s known as owners’ equivalent of rent — which tracks what Americans who own their houses would theoretically have to pay to lease a similar dwelling.

That category appears to have been artificially inflated in May by data collection problems, which seem to have been worked out. Without those issues, the trend may have been smoother.

Finally, non-seasonally adjusted data also suggest that housing has been cooling for a while.“Month to month there’s going to be some choppiness, but overall we’re on a sustainable path on shelter disinflation,” Sharif said.

If housing inflation stays calm, then the Fed’s fight against inflation is pretty much won. Shelter alone comprises about one-third of the Consumer Price Index, and other key categories have returned to normal. Used car prices, one of the biggest drivers of 2021’s sudden inflationary burst, have been on a consistent decline.

Today’s report was a much needed bit of good news for the Biden administration (though it will likely be drowned out by political drama, as we noted earlier this week). Its economics team points out that shelter isn’t the only factor that kept a lid on prices this month; Mike Konczal of the National Economic Council points out that “supercore” inflation, which excludes housing among other items, was at 0% for the month.

“The slowdown in inflation in the second quarter isn’t dependent on any one thing but instead shows a welcome overall slowdown in prices,” he said.