Low Inflation, Eh? Just Look at Housing Costs

Inflation has been tame for some time, but the most recent Consumer Price Index showed that one component hasn’t flagged much: housing.

Elevated housing costs have been the bane of first-time homebuyers recently, so this news should come as no surprise.

The core CPI, which excludes volatile food and energy, rose 2.4% in the 12 months ending in September, matching the August increase. The inflation reading only touched that point briefly in July 2018, and that level hasn’t been seen since right before the 2008 financial crisis.

At the vanguard of this relative surge (inflation is still pretty darn low, certainly) is housing. Before getting too carried away that inflation is about to finally take off, however, it is worth taking a look at housing costs,” wrote Wells Fargo’s economics group in a research note. Shelter amounts to a third of the core index, Wells noted.

Shelter has been running at around 3% annually since 2015, That contrast with goods, which until recently, have been down. And services, leaving out housing, have been increasing at a full percentage point below the pre-recession average, the Wells paper stated.

The Federal Reserve’s favorite inflation measurement, the Personal Consumption Expenditures or PCE index, looks at a basket of goods and services that it weighs differently than the CPI—by how much people use them. And some 40% of the PCE’s rise over the past year can be attributed to shelter, Wells said.

As the bank’s report assessed the matter: “Housing has underpinned inflation in recent years, as costs have grown faster than all other major categories of outlays and accounted for the largest portion of household spending.”

Low inflation readings will likely continue to be cold comfort to people in search of a house.

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