“Sticky” shelter costs could keep overall prices uncomfortably high.
The reason: Stubbornly high housing costs are keeping inflation in the services sector (as opposed to the goods sector) elevated. Broadly, the Consumer Price Index (CPI) rose by 3.6%* in December—but a closer look reveals that the cost of shelter jumped by a much larger 5.5%* (see the chart). That matters because the shelter category—a component of the services sector—accounts for a whopping 35% of the total calculated weight for the headline core inflation number.
Source: Bloomberg, as of 12/29/23
In short, high housing costs could make it much tougher for overall inflation to fall back to the Fed’s
target rate of 2%.
Housing costs remain high in part because of the sector’s natural lag time. Since rent prices are typically
locked in for an extended period—12 months, for example—housing costs in aggregate haven’t kept
pace with the lower prices we’re seeing for, say, eggs and gas.
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