Inflation Was Firmer Than Expected Due to the Undersupply of Housing
Inflation Was Firmer Than Expected Due to the Undersupply of Housing
The consumer price index came in slightly hotter than expected this morning, but showed continued gradual progress in the fight against inflation. The CPI rose 0.3% over the month, with year-over-year inflation falling to 3.1% from 3.4%. Core CPI rose 0.4% over the month, holding steady at 3.9%.
The Fed targets PCE inflation, which has been much softer lately. But the public typically focuses on CPI, and that remains well above the Fed’s target.
The major culprit was housing costs, which rose 0.6% in January and contributed over two thirds of overall inflation during the month. Even though high interest rates have dramatically cooled activity in the housing market, prices have not fallen because housing inventory is so scarce. Excluding housing, consumer prices rose only 1.5% over the year.
Among the major eight categories of goods and services in the CPI, housing costs have also been the largest contributor to inflation over the last year, after “other goods and services.”
Looking back further, energy and transportation prices have still risen more than housing prices since the pandemic, but both have been on a downward trend recently, while housing prices have continued to soar.
Today’s report should be a warning to policymakers that the biggest long-term threat to the Fed’s dual mandate and to the soft landing is policies that artificially limit the supply of housing. Expanding the supply of housing will require action on the part of thousands of separate local governments, but states have shown that they can make a difference through laws like accessory dwelling unit (ADU) reform, laws permitting the construction of duplexes in areas zoned for single family houses, reforms that remove procedural hurdles to development, and zoning overhauls.
Take a tour of the report through ZipRecruiter visualizations HERE.
