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Building Material Prices Continue to Grow at Slower Pace

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Prices for inputs to new residential construction—excluding capital investment, labor, and imports—were up 0.6% in March according to the most recent Producer Price Index (PPI) report published by the U.S. Bureau of Labor Statistics. The increase in February was revised upward to 0.7%. The Producer Price Index measures prices that domestic producers receive for their goods and services; this differs from the Consumer Price Index which measures what consumers pay and includes both domestic products as well as imports.

The inputs to the New Residential Construction Price Index grew 1.3% from March of last year. The index can be broken into two components—the goods component also increased 1.3% over the year, with services increasing 1.3% as well. For comparison, the total final demand index, which measures all goods and services across the economy, increased 2.7% over the year, with final demand with respect to goods up 0.9% and final demand for services up 3.6% over the year.

Input Goods

The goods component has a larger importance to the total residential construction inputs price index, representing around 60%. For the month, the price of input goods to new residential construction was up 0.5% in March.

The input goods to residential construction index can be further broken down into two separate components, one measuring energy inputs with the other measuring goods less energy inputs. The latter of these two components simply represents building materials used in residential construction, which makes up around 93% of the goods index.

Energy input prices fell 3.9% between February and March and were 14.9% lower than one year ago. Building material prices were up 0.8% between February and March and up 2.7% compared to one year ago. Energy costs have continued to fall on a year-over-year basis, as this marks the eighth consecutive month of lower input energy costs.

Metal products used in residential construction saw the largest price increases in the month of March. Across all inputs to new residential construction, ornamental and architectural metal work increased the most, up 21.0%. Ornamental and architectural metal work products increased 11.2% on a month-to-month basis, by far their largest monthly increase for the product, with the next closes being 7.9% back in October of 2021.

Input Services

While prices of inputs to residential construction for services were down 0.1% over the year, they were up 1.1% in March from February. The price index for service inputs to residential construction can be broken out into three separate components: a trade services component, a transportation and warehousing services component, and a services excluding trade, transportation and warehousing component (other services). The most significant component is trade services (around 60%), followed by other services (around 29%), and finally transportation and warehousing services (around 11%). The largest component, trade services, was up 0.7% from a year ago. The other services component was up 1.6% over the year. Lastly, prices for transportation and warehousing services advanced 3.6% compared to March last year.

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Inflation Cooled in March

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Inflation slowed to a 6-month low in March, largely driven by lower energy costs, especially in gasoline prices. Despite the easing, the report likely only captures part of the first wave of global tariffs announcement. The inflationary pressure from tariffs and escalating trade war continues to threaten the economic growth and complicate the Fed’s path to its 2% target. Meanwhile, while housing inflation remains elevated, it continues to show signs of cooling – the year-over-year change in the shelter index remained below 5% for a seven straight month and posted its lowest annual gain since November 2021.

While the Fed’s interest rate cuts could help ease some pressure on the housing market, its ability to address rising housing costs is limited, as these increases are driven by a lack of affordable supply and increasing development costs. In fact, tight monetary policy hurts housing supply because it increases the cost of AD&C financing. This can be seen on the graph below, as shelter costs continue to rise at an elevated pace despite Fed policy tightening. Additional housing supply is the primary solution to tame housing inflation and with it, overall inflation. This emphasizes why the cost of construction, including the cost of building materials, matters not just for housing but also the inflation outlook and the path of future monetary policy.

Consequently, the election result has put inflation back in the spotlight and added additional upside and downside risks to the economic outlook. Proposed tax cuts and tariffs could increase inflationary pressures, suggesting a more gradual easing cycle with a slightly higher terminal federal funds rate. However, economic growth could also be higher with lower regulatory burdens. Given the housing market’s sensitivity to interest rates, a higher inflation path could extend the affordability crisis and constrain housing supply as builders continue to grapple with lingering supply chain challenges.

During the past twelve months, on a non-seasonally adjusted basis, the Consumer Price Index rose by 2.4% in March, according to the Bureau of Labor Statistics’ report. This followed a 2.8% year-over-year increase in February. Excluding the volatile food and energy components, the “core” CPI increased by 2.8% over the past twelve months, the smallest increase since March 2021. A large portion of the “core” CPI is the housing shelter index, which increased 4.0% over the year, the smallest year-over-year increase since November 2021.  Meanwhile, the component index of food rose by 3.0%, and the energy component index fell by 3.3%.

On a monthly basis, the CPI fell by 0.1% in March (seasonally-adjusted), after a 0.2% increase in February. This was the first time the monthly CPI has fallen since May 2020. The “core” CPI increased by 0.1% in March.

The price index for a broad set of energy sources fell by 2.4% in March, with declines in gasoline (-6.3%) offset by increases in electricity (+0.9%) andnatural gas (+3.6%). Meanwhile, the food index rose 0.4%, after a 0.2% increase in February. The index for food away from home increased by 0.4% and the index for food at home rose by 0.5%.

Despite the overall monthly CPI decline, several indexes increased in March including personal care (+1.0%), medical care (+0.2%), education (+0.4%), apparel (+0.4%), as well as new vehicles (+0.1%). Meanwhile, the index for airline fares (-5.3%), used cars and trucks (-0.7%) and recreation (-0.3%) were among the major indexes that decreased over the month.

The index for shelter makes up more than 40% of the “core” CPI, rose by 0.2% in March, following an increase of 0.3% in February. The index for owners’ equivalent rent (OER) rose by 0.4% and index for rent of primary residence (RPR) increased by 0.3% over the month. Despite the moderation, shelter costs remained the largest contributors to headline inflation. 

NAHB constructs a “real” rent index to indicate whether inflation in rents is faster or slower than core inflation. It provides insight into the supply and demand conditions for rental housing. When inflation in rents is rising faster than core inflation, the real rent index rises and vice versa. The real rent index is calculated by dividing the price index for rent by the core CPI (to exclude the volatile food and energy components).

In March, the Real Rent Index rose by 0.3%. Over the first three months of 2025, the monthly growth rate of the Real Rent Index averaged at 0.1%, higher than 0.0% from the same period in 2024.

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Consumer Expectations Fall Again

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Consumer confidence fell for the fourth straight month amid growing concerns about the economic outlook and policy uncertainties, especially potential tariffs. Uncertainties continue to weigh on consumer sentiment as consumer confidence dropped to a 4-year low and expectations for the future economy fell to a 12-year low. The persistent decline in sentiment has raised recession concerns as consumers have grown pessimistic about economic conditions.

The Consumer Confidence Index, reported by the Conference Board, is a survey measuring how optimistic or pessimistic consumers feel about their financial situation. This index fell from 100 to 92.9 in March, the largest monthly decline since August 2021 and the lowest level since February 2021. The Consumer Confidence Index consists of two components: how consumers feel about their present situation and about their expected situation. The Present Situation Index decreased 3.6 points from 138.1 to 134.5, and the Expectation Situation Index dropped 9.6 points from 74.8 to 65.2, the lowest level since February 2013. This is the second consecutive month that the Expectation Index has been below 80, a threshold that often signals a recession within a year.

Consumers’ assessment of current business conditions turned negative in March. The share of respondents rating business conditions “good” decreased by 1.4 percentage points to 17.7%, while those claiming business conditions as “bad” rose by 1.8 percentage points to 16.7%. However, consumers’ assessments of the labor market improved slightly. The share of respondents reporting that jobs were “plentiful” remained unchanged at 33.6%, and those who saw jobs as “hard to get” decreased by 0.3 percentage points to 15.7%.

Consumers were pessimistic about the short-term outlook. The share of respondents expecting business conditions to improve fell from 20.8% to 17.1%, while those expecting business conditions to deteriorate rose from 25.5% to 27.3%. Similarly, expectations of employment over the next six months were less positive. The share of respondents expecting “more jobs” decreased by 2.1 percentage points to 16.7%, and those anticipating “fewer jobs” climbed by 1.9 percentage points to 28.5%.

The Conference Board also reported the share of respondents planning to buy a home within six months. The share of respondents planning to buy a home rose slightly to 5.4% in March. Of those, respondents planning to buy a newly constructed home increased to 0.5%, and those planning to buy an existing home dropped to 2.3%. The remaining 2.6% were planning to buy a home but undecided between new or existing homes.

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Fed Remains in Wait and See Mode

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In a widely anticipated move, the Federal Reserve remained on pause with respect to rate cuts at the conclusion of its March meeting, maintaining the federal funds rate in the 4.25% to 4.5% range. While the central bank acknowledged that the economy remains solid, it emphasized a data- and policy-dependent approach to future monetary policy decisions due to increased uncertainty. According to Chair Powell, the Fed “is not in any hurry” to enact policy change and is well positioned to wait to make future interest rate moves.

However, in a small dovish step, the Fed slowed the pace of its balance sheet reduction, but only for Treasuries. The Treasury security runoff will be reduced from $25 billion a month to $5 billion. The mortgage-backed security run-off process will remain at a $35 billion a monthly rate. Chair Powell stated that the change was not a signal of broader economic issues and was just a technical adjustment to the long-run goal of balance sheet reduction.

Although the Fed did not directly address ongoing trade policy debates (and particularly trade and tariff details expected on April 2) and their economic implications, it reaffirmed that future monetary policy assessments would consider “a wide range of information, including readings on labor market conditions, inflation pressures, and inflation expectations, and financial and international developments.”

With respect to prices, the Fed’s March statement noted that “inflation remains somewhat elevated.” For example, the CPI is at a 2.8% year-over-year growth rate. Shelter inflation, while improving as noted by Chair Powell, continues to run at an elevated 4.2% annual growth rate, significantly above the CPI. These costs are driven by challenges such as financing costs, regulatory burdens, rising insurance costs, and the structural housing deficit.

The March Fed statement highlighted the central bank’s dual mandate, noting its ongoing assessment of the “balance of risks.”  Crucially, the Fed reiterated its “strong commitment to support maximum employment and returning inflation to its 2 percent objective.”

The Fed also published its updated Summary of Economic Projections (SEP). The central bank reduced its GDP outlook for 2025 from 2.1% growth to just 1.7% (measured as percentage change from the fourth quarter of the prior year to the fourth quarter of the year indicated). Policy uncertainly likely played a role for this adjustment.

The Fed made only marginal changes to its forecast for unemployment, pointing to a 4.3% jobless rate for the fourth quarter of 2025. The Fed did lift its inflation outlook, increasing its forecast for Core PCE inflation from 2.5% for the year to 2.8%. Forecasters, including NAHB, have lifted inflation estimates for 2025 due to tariffs, although tariffs may only produce a one-off shift in the price level rather than a permanent increase for the inflation rate. Nonetheless, Chair Powell noted that tariffs have already affected inflation forecasts for 2025. The Fed’s SEP also indicated that the Fed may cut twice this year, placing the federal funds rate below 4% during the fourth quarter of 2025. However, those FOMC members who saw less than two rate cuts this year were more likely to forecast no rate cuts at all for 2025.

Looking over the long run, the SEP projections suggest that the terminal rate for the federal funds rate will be 3%, implying six total twenty-five basis point cuts in the future as rates normalize. This is lower than our forecast, which suggests a higher long-run inflation risk path and a terminal rate near 3.5%. A lower federal funds rate means lower AD&C loan rates for builders, which can help with housing supply and hold back shelter inflation.

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U.S. Sawmill Production Capacity Constant in 2024

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Sawmill and wood preservation firms reported lower capacity utilization rates coupled with level production and capacity throughout 2024. Despite no growth in production in 2024, utilization rates have trended downwards since 2017 as sawmills have expanded production capability. Even with more production capability, real output has not followed as output remains lower than 2018.

Capacity utilization rates are a ratio of actual production and potential production capabilities for firms. The utilization rate for sawmills and wood preservations firms was 64.7% in the fourth quarter on a four-quarter moving average basis. As utilization rates have shifted lower, the gap between full production capability and actual production has grown. Actual production is typically lower than full capability due to multiple factors ranging from insufficient materials and orders to lack of labor.

By combining the Federal Reserve’s production index and the Census Bureau’s utilization rate, we can compose a rough index estimate of what the current production capacity is for U.S. sawmills and wood preservation firms. Shown below is a quarterly estimate of the production capacity index. This capacity index measures the real output if all firms were operating at their full capacity.

Based on the data above, sawmill production capacity has increased from 2015 but remains lower than peak levels in 2011. Most of the recent capacity gains took place between 2023 and 2024, followed by little gain over the course of 2024. As evident above, there is ample room to increase production of domestic lumber, but current production levels remain much unchanged over the past several years.

Employment is an important factor for ensuring firms reach their full capacity. For sawmill and wood preservation firms, the number of employees declined to its lowest level since 2021, reporting an average of just over 89,000 employees across the industry in the fourth quarter. Employment declines, likely due to a weak lumber market in 2024, help explain why utilization rates have fallen. With fewer workers, it is less likely that a firm can increase production to its full capability.

Imports

Since U.S. firms do not produce at their full potential, imports help to supplement domestic supply, especially in the softwood lumber market. According to Census international trade data, existing tariffs on Canadian softwood lumber have not reduced the need for imports to meet domestic consumption but have made the U.S. more reliant on non-North American lumber, resulting in unnecessarily complex supply chains. The current AD/CVD Canadian softwood lumber tariff rate stands at 14.5% and is expected to double under the administrative review process by the Department of Commerce. Potential tariffs on lumber, such as the ongoing 232 investigation and 25% on all Canadian goods, could push tariffs rates on Canadian softwood lumber above 50% later this year. Higher tariffs on softwood lumber mean higher costs for builders who use lumber as a key input to construction. Given the current housing unaffordability crisis, any additional costs will continue push homeownership and affordable housing further out of reach for households in the U.S.

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Real Estate Asset Value Falls Again

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The market value of household real estate assets fell from $48.5 trillion to $48.1 trillion in the fourth quarter of 2024, according to the most recent release of U.S. Federal Reserve Z.1 Financial Accounts. Household real estate assets value have fallen for two consecutive quarters after peaking at $48.7 trillion in the second quarter of 2024. However, household real estate assets were 7.0% higher over the year in the fourth quarter following a 7.1% increase in the third quarter.

Real estate secured liabilities of households’ balance sheets, i.e. mortgages, home equity loans, and HELOCs, increased 0.8% over the fourth quarter to $13.3 trillion. This level is 2.6% higher compared to the fourth quarter of 2023, the same year-over-year increase as the third quarter.

Owners’ equity share of real estate assets remained above 72% for the fourth straight quarter. The share in the fourth quarter of 2024 was 72.2%, down from a peak of 73.0% just two quarters ago.

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Softwood Lumber Prices Continue to Lead Price Growth for Building Materials

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Prices for inputs to new residential construction—excluding capital investment, labor, and imports—were up 0.5% in February according to the most recent Producer Price Index (PPI) report published by the U.S. Bureau of Labor Statistics. The increase in January was revised downward to 1.1%. The Producer Price Index measures prices that domestic producers receive for their goods and services, this differs from the Consumer Price Index which measures what consumers pay and includes both domestic products as well as imports.

The inputs to the New Residential Construction Price Index grew 0.7% from February of last year. The index can be broken into two components—the goods component increased 1.2% over the year, while services decreased 0.1%. For comparison, the total final demand index, which measures all goods and services across the economy, increased 3.2% over the year, with final demand with respect to goods up 1.7% and final demand for services up 3.9% over the year.

Input Goods

The goods component has a larger importance to the total residential construction inputs price index, representing around 60%. For the month, the price of input goods to new residential construction was up 0.6% in February.

The input goods to residential construction index can be further broken down into two separate components, one measuring energy inputs with the other measuring goods less energy inputs. The latter of these two components simply represents building materials used in residential construction, which makes up around 93% of the goods index.

Energy input prices grew 2.6% between January and February but remained 8.5% lower compared to one year ago. Building material prices were up 0.5% between January and February while they were up 2.0% compared to one year ago.

Among materials used in residential construction, lumber and wood products ranks 3rd in terms of importance for the Inputs to New Residential Construction Index. Nonmetallic mineral products and metal products rank 1st and 2nd, respectively. The top lumber and wood products include general millwork, prefabricated structural members, not-edge worked softwood lumber, softwood veneer/plywood and hardwood veneer/plywood. Prices for these wood commodities experienced little growth for most of 2024. Currently, softwood lumber prices were 11.7% higher compared to one year ago while on a monthly basis, prices rose 3.0%. This marks the fourth straight month where yearly price growth was above 10% for softwood lumber.

Input Services

While prices of inputs to residential construction for services were down 0.1% over the year, they were up 0.4% in February from January. The price index for service inputs to residential construction can be broken out into three separate components: a trade services component, a transportation and warehousing services component, and a services excluding trade, transportation and warehousing component. The most significant component is trade services (around 60%), followed by services less trade, transportation and warehousing (around 29%), and finally transportation and warehousing services (around 11%). The largest component, trade services, was down 1.5% from a year ago. The services less trade, transportation and warehousing component was up 1.6% over the year.  Lastly, prices for transportation and warehousing services advanced 2.2% compared to February last year.

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Inflation Eased Ahead of Tariffs

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Inflation slowed to a 3-month low in February, with decreases in airfares and gasoline partially offsetting shelter increases. Despite the easing, the report does not capture upcoming tariff impacts. The inflationary pressure from tariffs and trade war would weigh on the economy and complicate the Fed’s path to its 2% target. Meanwhile, while housing drove nearly half of February’s inflation increase and remains higher than the 2019 pre-pandemic average of 3.4%, it continues to show signs of cooling – the year-over-year change in the shelter index remained below 5% for a sixth straight month and posted its lowest annual gain since December 2021. 

While the Fed’s interest rate cuts could help ease some pressure on the housing market, its ability to address rising housing costs is limited, as these increases are driven by a lack of affordable supply and increasing development costs. In fact, tight monetary policy hurts housing supply because it increases the cost of AD&C financing. This can be seen on the graph below, as shelter costs continue to rise at an elevated pace despite Fed policy tightening. Additional housing supply is the primary solution to tame housing inflation and with it, overall inflation. This emphasizes why the cost of construction, including the cost of building materials, matters not just for housing but also the inflation outlook and the path of future monetary policy.

Consequently, the election result has put inflation back in the spotlight and added additional upside and downside risks to the economic outlook. Proposed tax cuts and tariffs could increase inflationary pressures, suggesting a more gradual easing cycle with a slightly higher terminal federal funds rate. However, economic growth could also be higher with lower regulatory burdens. Given the housing market’s sensitivity to interest rates, a higher inflation path could extend the affordability crisis and constrain housing supply as builders continue to grapple with lingering supply chain challenges.

During the past twelve months, on a non-seasonally adjusted basis, the Consumer Price Index rose by 2.8% in February, according to the Bureau of Labor Statistics’ report. This followed a 3.0% year-over-year increase in January. Excluding the volatile food and energy components, the “core” CPI increased by 3.1% over the past twelve months, marking the first notable decline after hovering between 3.2% and 3.3% since June 2024. A large portion of the “core” CPI is the housing shelter index, which increased 4.2% over the year, the smallest year-over-year increase since December 2021.  Meanwhile, the component index of food rose by 2.6%, and the energy component index fell by 0.2%.

On a monthly basis, the CPI rose by 0.2% in February (seasonally-adjusted), after a 0.5% increase in January. The “core” CPI increased by 0.2% in February.

The price index for a broad set of energy sources rose by 0.2% in February, with declines in gasoline (-1.0%) offset by increases in electricity (+1.0%), natural gas (+2.5%) and fuel oil (+0.8%). Meanwhile, the food index rose 0.2%, after a 0.4% increase in January. The index for food away from home increased by 0.4% and the index for food at home remained unchanged.

The index for shelter (+0.3%) was the largest contributor to the monthly increase in all items index, accounting for nearly half of the total increase. Other top contributors that rose in February include indexes for medical care (+0.3%), used cars and trucks (+0.9%), household furnishings and operations (+0.4%), as well as recreation (+0.3%). Meanwhile, the index for airline fares (-4.0%) and new vehicles (-0.1%) were among the few major indexes that decreased over the month.

The index for shelter makes up more than 40% of the “core” CPI, rose by 0.3% in February, following an increase of 0.4% in January. Both indexes for owners’ equivalent rent (OER) and rent of primary residence (RPR) increased by 0.3% over the month. Despite the moderation, shelter costs remained the largest contributors to headline inflation. 

NAHB constructs a “real” rent index to indicate whether inflation in rents is faster or slower than core inflation. It provides insight into the supply and demand conditions for rental housing. When inflation in rents is rising faster than core inflation, the real rent index rises and vice versa. The real rent index is calculated by dividing the price index for rent by the core CPI (to exclude the volatile food and energy components).

In January, the Real Rent Index rose by 0.1%. Over the first two months of 2025, the monthly growth rate of the Real Rent Index averaged remained flat at 0.0%, unchanged from the same period in 2024.

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Residential Construction Input Prices Increase to Start the Year

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Prices for inputs to new residential construction—excluding capital investment, labor, and imports—were up 1.2% in January according to the most recent Producer Price Index (PPI) report published by the U.S. Bureau of Labor Statistics. The Producer Price Index measures prices that domestic producers receive for their goods and services, this differs from the Consumer Price Index which measures what consumers pay and includes both domestic products as well as imports.

The inputs to the New Residential Construction Price Index grew 1.1% from January of last year. The index can be broken into two components—the goods component increased 2.1% over the year, while services decreased 0.3%. For comparison, the total final demand index, which measures all goods and services across the economy, increased 3.5% over the year, with final demand with respect to goods up 2.3% and final demand for services up 4.1% over the year.

Input Goods

The goods component has a larger importance to the total residential construction inputs price index, representing around 60%. For the month, the price of input goods to new residential construction was up 1.6% in January. Monthly growth of the index was relatively low in the past two years, as this monthly increase was the largest since March of 2022 (3.3%).

The input goods to residential construction index can be further broken down into two separate components, one measuring energy inputs with the other measuring goods less energy inputs. The latter of these two components simply represents building materials used in residential construction, which makes up around 93% of the goods index.

The 2.1% yearly growth in the goods component can be attributed to the rise in the prices of building materials, which grew 2.3% over the year. Meanwhile, the price of energy inputs was 1.6% lower than last year. Between December and January, building materials increased 1.4%, while energy inputs increased 4.3%.

At the individual commodity level, the five commodities with the highest importance for building materials to the New Residential Construction Index were as follows: ready-mix concrete, general millwork, paving mixtures/blocks, sheet metal products, and wood office furniture/store fixtures. Compared to last year, ready-mix concrete was up 4.1%, wood office furniture/store fixtures up 4.7%, general millwork up 2.4%, paving mixtures/blocks up 8.6% while sheet metal products were up 0.4%.

For January, the commodity used in new residential construction that featured the highest price growth was an energy input, home heating oil and distillates, increasing 16.0%. The non-energy input that had the highest monthly price growth was paving mixtures and blocks, up 14.8%. This is likely a pass-through of increases in asphalt prices, which were up 6.9% in January.

Input Services

While prices of inputs to residential construction for services were down 0.3% over the year, they were up 0.5% in January from December. The price index for service inputs to residential construction can be broken out into three separate components: a trade services component, a transportation and warehousing services component, and a services excluding trade, transportation and warehousing component. The most significant component is trade services (around 60%), followed by services less trade, transportation and warehousing (around 29%), and finally transportation and warehousing services (around 11%). The largest component, trade services, was down 1.9% from a year ago. The services less trade, transportation and warehousing component was up 1.6% over the year.   Lastly, prices for transportation and warehousing services advanced 3.1% compared to January last year, the largest year-over-year increase since January of 2023.

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Inflation Accelerated in January

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Inflation edged up to a six-month high in January and showed little progress from a year ago. The persistent inflation rate indicates the last mile to the Fed’s 2% target continues to be challenging and is consistent with the Fed’s cautious stance amid solid economic growth and growing uncertainty. While core inflation remained stubborn due to elevated shelter and other service costs, housing costs showed signs of cooling – the year-over-year change in the shelter index remained below 5% for a fifth straight month and posted its lowest annual gain since January 2022, suggesting a continued moderation in housing inflation.

While the Fed’s interest rate cuts could help ease some pressure on the housing market, its ability to address rising housing costs is limited, as these increases are driven by a lack of affordable supply and increasing development costs. In fact, tight monetary policy hurts housing supply because it increases the cost of AD&C financing. This can be seen on the graph below, as shelter costs continue to rise at an elevated pace despite Fed policy tightening. Additional housing supply is the primary solution to tame housing inflation.

Furthermore, the election result has put inflation back in the spotlight and added additional upside and downside risks to the economic outlook. Proposed tax cuts and tariffs could increase inflationary pressures, suggesting a more gradual easing cycle with a slightly higher terminal federal funds rate. However, economic growth could also be higher with lower regulatory burdens. Given the housing market’s sensitivity to interest rates, a higher inflation path could extend the affordability crisis and constrain housing supply as builders continue to grapple with lingering supply chain challenges.

During the past twelve months, on a non-seasonally adjusted basis, the Consumer Price Index rose by 3.0% in January, according to the Bureau of Labor Statistics’ report. This followed a 2.9% year-over-year increase in December. Excluding the volatile food and energy components, the “core” CPI increased by 3.3% over the past twelve months, following a 3.2% increase in December. The “core” CPI has held near 3.3% since May 2024. A large portion of the “core” CPI is the housing shelter index, which increased 4.4% over the year, following a 4.6% increase in December.  Meanwhile, the component index of food rose by 2.5%, and the energy component index increased by 1.0%.

On a monthly basis, the CPI rose by 0.5% in January (seasonally-adjusted), after a 0.4% increase in December. The “core” CPI increased by 0.4% in January, the highest monthly gain since March 2024.

The price index for a broad set of energy sources rose by 1.1% in January, with increases in gasoline (+1.8%), fuel oil (+6.2%), and natural gas (+1.8%), while the electricity index remained flat. Meanwhile, the food index rose 0.4%, after a 0.3% increase in December. The index for food away from home increased by 0.2% and the index for food at home rose by 0.5%.

The index for shelter (+0.4%) was the largest contributor to the monthly increase in all items index, accounting for nearly 30% of the total increase. Other top contributors that rose in January include indexes for motor vehicle insurance (+2.0%), recreation (+1.0%), as well as used cars and trucks, (+2.2%). Meanwhile, the index for apparel (-1.4%), personal care (-0.1%) and household furnishings (-0.2%) and operations were among the few major indexes that decreased over the month.

The index for shelter makes up more than 40% of the “core” CPI, rose by 0.4% in January, following an increase of 0.3% in December. Both indexes for owners’ equivalent rent (OER) and rent of primary residence (RPR) increased by 0.3% over the month. Despite the moderation, shelter costs remained the largest contributors to headline inflation. 

NAHB constructs a “real” rent index to indicate whether inflation in rents is faster or slower than core inflation. It provides insight into the supply and demand conditions for rental housing. When inflation in rents is rising faster than core inflation, the real rent index rises and vice versa. The real rent index is calculated by dividing the price index for rent by the core CPI (to exclude the volatile food and energy components).

In January, the Real Rent Index fell by 0.1%. This marks the first time since December 2021 that rental prices grew slowly than core inflation.

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