While housing costs were once again the biggest contributor behind October’s inflation, they posted a substantial slowdown on a yearly basis.
The shelter component of the Consumer Price Index (CPI) rose 0.4% over the previous month, marking the largest factor in the monthly increase in the core index that excludes food and energy, the Bureau of Labor Statistics reported Tuesday.
Year over year, the component grew 6.7% — still high, but dropping an impressive 50 basis points from September's annual gain and continuing a six-month downward trend from the peak of 8.2% in March.
October’s results highlight that "real-time data is making its way to the CPI index and that is a positive thing," EY chief economist Gregory Daco, told Yahoo Finance following the release because high housing costs have been frustrating the Fed’s campaign to bring down inflation.
"It takes time for both home prices and rents to filter through to the CPI index," Daco said. "Home prices and rents have been cooling significantly, so we're still anticipating to see more disinflationary pressure as we move into 2024 on the shelter front."
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Headline inflation rose 3.2% in the 12 months through October, a deceleration from the 3.7% annual gain in prices, and unchanged from the prior month. While the pace of inflation is still high compared to the Federal Reserve’s long-term target of 2%, it's on the right track.
"This type of report will comfort the Fed that its monetary policy is sufficiently restrictive to bring inflation down to 2%," Daco said. "And while policymakers will want to retain that optionality of further tightening, they won't admit to the end of the tightening cycle."
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The shelter index plays a big role — making up a third of overall inflation. It's a gauge that measures the national cost of housing for both renters and homeowners as well as lodging away from home and tenants’ and household insurance.
Owner's equivalent rent, or OER, and rent are by far the biggest components of the shelter index. OER is the hypothetical rent you’d pay for your own property and indirectly takes into account home price growth.
OER makes up 74% of the shelter index, or contributes 24.42% to overall CPI, while rent accounts for a smaller portion of both — 22% of the shelter index and 7.5% of CPI.
In October, OER rose 0.4% month over month, down from September's 0.6% increase, while rent prices were up 0.5% on a seasonally adjusted basis, unchanged from the previous month.
The rent component is known to be a lagging indicator, not showcasing real-time data. The rental market has cooled in part because there’s a lot more inventory, pushing landlords to grapple with rising vacancies and having less leverage to raise rents.
For example, rents in October fell by 0.4% over the previous month, following the 0.5% decline in September, according to Apartments.com. Rents grew by 0.7% in the 12 months through October, continuing a slowdown in growth over the past year. By contrast, rents posted an annual gain of 4.8% in October 2022.
"If we start to see consistent 0.3% and 0.2% monthly increases in both [OER and rents] I think that's the point where we can really start to feel good about shelter costs and the trend," Greg McBride, chief financial analyst at Bankrate, told Yahoo Finance.
Separately, home prices — which indirectly impacts OER — finished the summer at another record high as affordability remains strained. The S&P CoreLogic Case-Shiller National Home Price Index climbed 0.9% in August month over month and 2.6% annually on a seasonally adjusted basis, marking an all-time high for the index.
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The rise in home prices isn’t expected to ease this year. This could translate into a bumpy road to curb shelter inflation. Goldman Sachs housing economists expect home prices to appreciate 2% on a seasonally adjusted basis for the year, up from its earlier forecast of a 1.8% gain.
"Inflation is always bumpy," Daco said. "It was bumpy on the upside. We had a few months where we had big surges and then other months where we had moderate surges."
"That's going to be the same process on the way down."
Read more inflation coverage:
Consumer prices were unchanged in October, core inflation rises at slowest pace since September 2021
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Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.