Why housing inflation takes time to slow down?

The pace of inflation slowed more than experts anticipated in November, according to the latest government inflation report. This marks the second month in a row that overall inflation shows signs of declining. 

The Consumer Price Index shows that overall inflation slowed to 7.1% year over year in November the smallest 12-month increase since January. While prices are still rising, the rate at which they’re going up has started to stall. For context, last month, inflation sat at a 7.7% increase for the year.

While the rise in food and energy prices slowed slightly, housing prices continue to climb, rising 7.1% over the last twelve months in November. In October, that figure was 6.9%.

Housing inflation: Long and variable lags

We used more than 20 years of historical data to estimate the correlation between current housing inflation and past housing price growth.

The results show that housing inflation in the consumer price index can be best predicted using data on housing price growth from 17 months prior, and in the personal consumption expenditures index from 19 months prior. There is roughly an 18-month to two-year lag before policymakers can assess the impact of changing housing prices and inflation.

How do we know we’re in a period of inflation?

Inflation isn’t a physical phenomenon we can observe. It’s an idea that’s backed by a consensus of experts who rely on market indexes and research. 

One of the most closely watched gauges of US inflation is the Consumer Price Index, which is produced by the federal Bureau of Labor Statistics and based on the diaries of urban shoppers. The CPI reports track data on 80,000 products, including food, education, energy, medical care and fuel.

The BLS also puts together a Producer Price Index, which tracks inflation more from the perspective of the producers of consumer goods. The PPI measures changes in seller prices reported by industries like manufacturing, agriculture, construction, natural gas and electricity.

And there’s also the Personal Consumption Expenditures price index, prepared by the Bureau of Economic Analysis, which tends to be a broader measure, because it includes all goods and services consumed, whether they’re bought by consumers, employers or federal programs on consumers’ behalf. 

The current inflationary period generally started when the Labor Department announced that the CPI increased by 5% in May 2021, following an increase of 5% in April 2021 a rise that caused a stir among market watchers. 

Though a rise in the CPI in and of itself doesn’t mean we’re necessarily in a cycle of inflation, a persistent rise is a troubling sign. 

What’s causing such high inflation? 

Today’s inflation was originally categorized as “transitory” — thought to be temporary while economies bounced back from COVID-19. US Treasury Secretary Janet Yellen and economists pointed to an unbalanced supply-and-demand scale as the cause for transitory inflation, provoked when supply-chain disruptions converged with high consumer demand. All of this had the effect of increasing prices.

But as months progressed, inflation started seeping into portions of the economy originally undisturbed by the pandemic, and production bottlenecks persisted. The US was then hammered by shocks to the economy, including subsequent COVID variants, lockdowns in China and Russia’s invasion of Ukraine, all leading to a choked supply chain and soaring energy and food prices.