U.S. inflation rose slightly higher in January than Wall Street analysts expected, driven mostly by the rising cost of eggs, gasoline and electricity.
But there's another major factor weighing down the economy, experts said: housing. Shelter costs — a lagging measurement the U.S. Bureau of Labor Statistics uses to gauge housing expenses — have climbed 4.4% year over year, according to Consumer Price Index data released Wednesday. By comparison, overall inflation jumped 3% compared to the previous 12 months.
"The stickiest part of the inflation measure has been the housing component," Lisa Sturtevant, chief economist at Bright MLS, said in a statement. In January, housing accounted for nearly 30% of the overall monthly rise in prices, CPI data showed.
The housing market is a major component of the U.S. economy, contributing to the nation's household wealth, employment and gross domestic product. But the cost of buying a home has soared in recent years, as asking prices and mortgage rates inch higher.
The national median home sale price rose to $404,000 in December, up from $381,400 the year prior, according to the most recent data available from the National Association of Realtors. Adding insult to injury, homeowners insurance rates are rising for a swath of Americans — particularly those living in natural disaster-prone parts of the country such as California, Florida and Texas.
Home prices are high, in part, because a flurry of potential homebuyers emerged from the pandemic at a time when housing supply was woefully unprepared, industry analysts have said. That combination has led to strong demand for single-family homes and condominiums. Would-be homebuyers who haven't been able to pay the price of a house have opted to remain as renters, thus driving up apartment costs.
Other economists also noted Wednesday how housing is keeping inflation sticky. The latest CPI data marks "a painful report down the line," Robert Frick, corporate economist at Navy Federal Credit Union, said in a statement.
"Not only did inflation rise unexpectedly, but increases were focused in categories consumers struggle with most, especially groceries, shelter and auto insurance," Frick said.
A 3% CPI report is particularly troublesome because the Federal Reserve has long held aspirations to cool inflation to around 2%. Hours after the CPI data landed, Federal Reserve Chairman Jerome Powell told federal lawmakers that the 2% goal is still attainable and there's no need as of now to lower the benchmark interest rate to help reach the goal.
“We are close but not there on inflation," Powell said during a congressional hearing Wednesday. "Today's inflation print ... says the same thing. We have made great progress, but we are not quite there."
Sturtevant and other economists said the Fed's goal could come true, but only after the housing market experiences some considerable shifts.
"It will be very hard for the headline inflation number to reach the Fed’s 2% goal without a slowdown in housing costs," Sturtevant said. "More housing supply — both rental and for-sale housing — is the key to easing housing costs and bringing the overall rate of inflation down.”