Key Takeaways

Shelter costs were once a main driver of inflation. That may finally be changing, with Wednesday's CPI report for July set to offer fresh clues that could inform the outlook for interest rates.

Home prices and rent soared during the pandemic as high demand for housing ran headlong into consumers relatively flush with cash because of government stimulus programs and ultra-low mortgage rates.

Rental increases stabilized in early 2022 after the Federal Reserve started raising interest rates to combat inflation. That change was slow to be reflected in the widely-watched Consumer Price Index since changes in asking rents typically take a year or more to show up in CPI measures of housing costs.

Shelter costs rose 0.17% in July, the smallest increase since January 2021 according to last month’s CPI report. Because housing is such an important part of the overall measure of inflation, that moderation helped push the annual rate down to 3%.

Many economists expect the trend to continue in Wednesday’s highly anticipated report on July inflation.

Lower Rent Inflation Could Encourage a Rate Cut

If official inflation measures continue to show a cooling of rent prices, it could augment the case for the Fed to lower its benchmark fed funds rate at its next meeting in September .

“Given the sharp deceleration in rental inflation, much of the focus will be on whether or not the more normal prints in the June data will repeat themselves,” Justin Weidner and other economists at Deutsche Bank wrote in a commentary. “Given that the regional rent data did not seem to exhibit any anomalies and leading indicators are constructive, we expect that to be the case.”

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