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Annual inflation ticked up again last month for the first time since March, thanks in large part to rising housing costs.
Overall prices rose 2.6% in October from a year ago, which was more than the 2.4% annual gain recorded in September, according to the latest consumer price index data released by the Labor Department on Wednesday.
Housing costs rose 4.9% from a year ago, accounting for half of the overall inflation figure, which excluding shelter would have been just 1.3% for the year. It means that housing costs are now a major complicating factor in the Federal Reserve’s push to declare victory against inflation and continue lowering interest rates.
Paradoxically, many economists argue that higher interest rates are actually pushing housing costs higher by making it more difficult for homebuilders to borrow money and build homes. Traditionally, higher rates are a tool to cool inflation, by raising borrowing costs and making consumers more selective about how they spend their money.
For homebuyers, the latest inflation figures could spell bad news for mortgage rates. If it follows its traditional path, the Fed could be more reluctant to continue cutting its policy rate quickly in the face of rising inflation figures. Although the Fed does not directly control mortgage rates, looser monetary policy typically translates to lower mortgage rates over time.
“An uptick in inflation was expected in October, but today’s reading could set up a fourth quarter that would be slightly above recent September Fed projections. This could warrant a slower pace of monetary policy normalization, which would mean a rate pause in December rather than another cut,” says Realtor.com® Chief Economist Danielle Hale.
Mortgage rates have now risen for six consecutive weeks, hitting an average of 6.79% for the week ending on Nov. 7, according to Freddie Mac. Combined with home prices that remain at seasonal record highs, it has made for a fall homebuying season that is less favorable for buyers than some had expected.
“Housing affordability is still a major concern both for renters and prospective homebuyers. Higher inflation can make it harder for would-be homebuyers to save for a down payment. In addition, rising inflation could also lead to higher mortgage rates,” says Bright MLS Chief Economist Lisa Sturtevant.
Why housing inflation remains high
Shelter accounts for more than a third of the overall consumer price index, but it is reported on a delayed basis that can lag up to six months. Costs for homeowners are reported as “owner’s equivalent rent,” or the estimated cost to rent the homeowner’s primary residence.
It means that inflation data for shelter might primarily reflect changes in rental markets up to a half-year ago, rather than real-time changes to actual monthly costs for homeowners, who account for two-thirds of the population.
In October, owner’s equivalent rent rose 5.2% from a year ago, faster than the 4.6% annual increase in traditional rent. Owner’s equivalent rent, which accounts for more than a quarter of the overall index, rose 0.5% from the prior month, while traditional rent rose 0.4% on a monthly basis.
Overall housing costs rose 4.9% annually in October, matching the annual gain recorded the prior month.
“Economists are debating whether housing rent is that strong, considering the huge number of newly completed empty apartment units hitting the market, especially in the Southern states,” says Lawrence Yun, chief economist at the National Association of Realtors®. “Irrespective, the overall inflation rate is normalizing, and the Federal Reserve can move away from its current restrictive monetary policy, which means further cuts to the short-term interest rate in upcoming months.”
Whether inflation continues to stabilize next year remains the big question. Many economists view President-elect Donald Trump‘s signature policy proposals, including tariffs and large-scale deportations of illegal immigrants, as likely to drive consumer prices higher.
“Inflation could be the wild card that drives the 2025 housing market. Overall home sales in 2024 are likely to be right around what they were in 2023—a 30-year low in the number of transactions. With uncertainties around government spending, taxes, tariffs, and immigration policy, inflation could move higher and could stifle the prospects for a housing market rebound,” says Sturtevant.