The Role of Housing in U.S. Inflation
In August 2024, U.S. inflation showed modest easing, with the Consumer Price Index (CPI) rising by 0.2% for the month and 2.5% year-over-year, down from 2.9% previously. Core inflation, excluding volatile food and energy prices, ticked up slightly to 0.3% monthly and matched expectations at 3.2% annually. However, housing costs emerged as a significant driver of this inflationary pressure. Despite an overall decrease in core inflation rates, housing inflation remains a major concern, contributing nearly 16 basis points to the overall 19 basis points increase in CPI for August. This is indicative of the persistent impact of tight housing markets and a decade-long shortage of affordable housing.
The ongoing role of housing in inflation highlights a critical structural issue within the U.S. housing market. Since housing costs constitute around 45% of the core CPI basket, their persistent inflation has a disproportionate effect on overall core inflation rates. Although core inflation has reduced significantly from its peak of 6.6% in September 2022, it remains elevated largely due to housing costs. The Biden/Harris administration’s proposed policies aim to address this supply shortfall by adding 2-3 million affordable housing units, which could help alleviate housing price pressures and contribute to broader inflation relief.