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How the Cost of Shelter Impacts Inflation [VIDEO] Thumbnail

How the Cost of Shelter Impacts Inflation [VIDEO]

In June, the Fed paused interest rate hikes after 10 straight increases totaling 5 percentage points. Their mission to thwart inflation appears to be succeeding as June's headline inflation rate (Consumer Price Index or CPI) fell to 3.0% from June 2022's peak of 9.1%:

Chart - Inflation has eased

The Fed would like to see inflation fall even further as measured by their preferred inflation gauge, the Personal Consumption Expenditures price index (PCE).  Both PCE and CPI measure inflation, although PCE tends to run a bit cooler than the CPI due to differences in make up and component weightings.  The Fed has been careful to signal the battle against inflation isn't over and a few more rate hikes are likely in the months ahead.

The cost of shelter plays a significant role in the level of inflation.  Shelter costs are about 33% of CPI and 15% of PCE1.  As illustrated in the chart below, rents have been steadily climbing in recent years and have contributed to elevated inflation levels:Chart: Cost to Rent vs. Cost to Buy

While rents and owner equivalent rents are included in inflation figures, home purchases and mortgage payments are not.  Home ownership is treated as an investment not a consumption line item by government statistical bureaus.  That said, it is interesting to observe just how volatile mortgage payments are in comparison to rents.  Purchasing a home is more dependent on fluctuating home prices and mortgage rates which directly impact loan sizes and interest costs. 

For example, monthly mortgage payments grew rapidly in 2005 and 2006 with home price inflation. After the housing bubble popped during the 2008 financial crisis, mortgage payments declined -25% in 2009 as home prices and mortgage rates fell, even as rents continued to grow.

The past few years highlighted the volatility of mortgage payments as homebuyers felt the strain of rising home prices and mortgage rates. S&P’s 20-City Composite Index rose each month from June 2020 through June 2022, with home price growth peaking at +21.2% year-over-year in April 2022. In parallel, the average 30-year fixed rate mortgage climbed from less than 3% in early 2021 to around 7% today. While rent payments are rising at the fastest pace in four decades, mortgage payments are rising even faster due to the combination of increasing home prices and mortgage rates.

Historically, housing's contribution to Gross Domestic Product or GDP has averaged 15-18%, so this data is important in gauging the health of the overall economy2.



1. Cotton, C & O'Shea, J, "Forecasting CPI Shelter under Falling Market-Rent Growth", February 2023, Federal Reserve Bank of Boston.

2. National Association of Home Builders (NAHB)


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