September's Consumer Price Index (CPI) report came in hotter than analysts expected, but the data offered one major point of optimism: Shelter cost increases came down during the month, flashing an encouraging economic signal that the most stubborn contributor to inflation may finally be giving ground.
According to data from the Bureau of Labor Statistics released Thursday, shelter costs — which, along with food, contributed over 75% of the monthly increase in consumer prices — ticked up 0.2% month over month in September, lower than August's 0.5% increase. On an annual basis, shelter cost increases rose 4.9% in September, down from August's year-over-year gain of 5.2%.
"The sharp reversal in shelter inflation allays fears that it could reaccelerate after the jump in August and brings the trend back toward the gradual disinflation that we continue to expect," said Parker Ross, global chief economist at Arch Capital Group.
For over a year, the stickiness of rent prices reflected in the CPI report has confounded policymakers even as separate data has shown rents have come down from their 2022 highs. Economists have expected a slowdown in rent increases as the Federal Reserve's tightening campaign eased pricing pressures across the economy. Part of the discrepancy can be explained because BLS collects rent data every six months.
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"Shelter is still a key driver in price increases, though our analysis shows it will continue to moderate in line with median home prices," said Constance Hunter, chief economist at the Economist Intelligence Unit.
According to the report, rents gained 0.3% in September from the previous month, slightly lower than August's 0.4% increase. Owners' equivalent rent also showed signs of cooling, rising 0.3% for the month, slowing down from August's 0.5% increase. Owners' equivalent rent is the estimated rent a homeowner would pay if they were renting their own property.
Overall, September CPI rose 0.2% over the previous month, matching the monthly increase from August but coming in hotter than economist estimates of a 0.1% increase. Economists continue to believe CPI data will eventually show a consistent deceleration in rental prices.
"The takeaway for the Fed is that the alternative measures of shelter cost inflation have been pointing to a cool down for a while now. But the Fed has their report card, and now the shelter part of the report card is looking better," said Bill Adams, chief economist for Comerica Bank.
"Shelter is a big part of a cost of living so shelter inflation coming down is going a long way towards getting overall inflation back to the Fed's target."
Despite the encouraging September data, some economists see shelter inflation posing a lingering challenge to the Fed because of the lack of supply of homes for sale and fresh interest rate cuts, which could put upward pressure on rents.
Just as the CPI print starts to reflect lagging trends, rent increases might start accelerating again.
“We remain concerned that we will not see much further disinflation in the OER or rent going forward, as modest rate cuts may spur more demand and may not be enough to make construction a more attractive prospect,” Thomas Simons, an economist at Jefferies, wrote in a note Thursday.
Hamza Shaban is a reporter for Yahoo Finance covering markets and the economy. Follow Hamza on X @hshaban.
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