Housing is the largest expense for many Americans. And it’s taking a bigger bite out of people’s wallets, as far as the Consumer Price Index is concerned. The shelter component of the inflation barometer increased 0.4% between November and December, down slightly from a 0.5% uptick the prior month. Nevertheless, annual growth set records. In particular, the component that measures the equivalent rent that homeowners would pay for their houses rose 3.8% between December 2020 and December 2021, the highest rate since 2007. The cost of shelter is the biggest component of the overall Consumer Price Index, reflecting the importance of rent and mortgage payments in a household’s budget. For starters, it’s a necessity. Most people can’t avoid having to pay for housing, whether you rent or own. Renters and buyers face similar headwinds, for slightly different reasons. For buyers, supply constraints have pushed up prices for housing, exacerbated by rising costs for materials such as lumber. Renters are seeing rents increase as people gradually return to cities.
But even as housing inflation has risen to record levels in terms of the index, the increases seem small by comparison to other barometers of home prices. That’s because the COVID-19 pandemic has complicated our ability to gauge housing inflation even further. For most homeowners, the cost of owning a home does not vary month to month or even year to year, because these days most people make use of fixed-rate mortgages. So, while taxes may fluctuate some, the cost in terms of the mortgage won’t change after they buy the home unless they refinance. Considering runaway inflation, the Federal Reserve has signaled that it will take swift action to cool down the economy. Central bankers have indicated they will both increase interest rates and winnow down their bond-buying activities as a result. Even if housing inflation does hit its peak in the coming months, Americans and the Fed alike can’t expect the situation to correct itself quickly. For starters, the pandemic-era home-buying craze has proven that millennials have entered the housing market — and they are legion.