Consumer prices rose 3.4% year-over-year in July, according to the Bureau of Labor Statistics, while shelter costs increased 3.2%. That’s a significant slowdown from a few years ago, when shelter inflation was running above 7%.
The slowdown matters because shelter makes up a large share of the Consumer Price Index, one of the most widely followed measures of inflation. Rapid growth in housing costs was one of the biggest reasons inflation remained stubbornly high even as some of the initial pandemic-era pressures eased. Today, shelter is still contributing to inflation, but much less than it was a few years ago.
Energy Is Back in Focus
As shelter inflation has cooled, energy has emerged as a renewed source of pressure. Energy prices were 14.7% higher in July than a year earlier, driven in large part by a 24.6% increase in gasoline prices. This marks a notable shift from much of the past two years, when energy was often a neutral or moderating force on overall inflation.
The monthly data tells a more nuanced story. Energy prices fell 1.5% from June to July, including a 2.9% decline in gasoline prices. Energy prices are notoriously volatile, however, and renewed geopolitical tensions have recently pushed oil prices higher again.
The Housing Link
Energy prices touch several parts of the residential construction process. Fuel is needed to transport building materials and equipment, make deliveries, and travel to and from job sites. “Sustained increases could add another source of cost pressure at a time when builders are already navigating elevated construction costs,” said Ali Wolf, chief economist for NewHomeSource.
Energy costs can hit buyers directly, too, and the impact can vary depending on where they live. Some markets are more resilient to higher energy costs, while others can be more expensive due to greater reliance on transportation or higher utility costs. New construction may offer some protection through newer energy-efficiency standards, which can help keep ongoing utility costs in check.
Looking Forward
The bigger question, however, may be what happens with inflation overall. The Federal Reserve has been looking for sustained progress on inflation as it considers the path for interest rates. If higher energy costs keep inflation elevated, that path could become more complicated.
That matters for housing because borrowing costs remain one of the biggest constraints on the market. Shelter inflation moving in the right direction is encouraging, but whether broader inflation follows will help shape where interest rates go from here. The broader inflation picture will be important to watch in the months ahead, particularly for a housing market still waiting for meaningful relief.
