The annual inflation rate rose for the sixth straight month in November as the economy gradually recovers from the COVID effect. Over the last 12 months, the inflation rate rose 1.2%, compared to 1.2% and 1.4% in the last two months respectively. In the meantime, core inflation, which excludes food and energy, rose to 1.6%, remaining well below the Federal Reserve's 2.0% core target.
One major component of the inflation rate is associated with the cost of housing. Specifically, rents rose by 2.4% over the past 12 months to November. However, compared to the previous month, rents are rising at a slower pace meaning that demand for rental homes falls off a bit. In the meantime, according to the latest release from the U.S. Census, the rental vacancy rate increased in Q3 2020 compared to Q2 2020. Thus, more rental units are available in the market putting downward pressure on rents. Especially, principal cities experience higher gains in rental vacancy rates confirming the trend that people move and buy homes in the suburbs. So, expect rents to soften in 2021, particularly in the principal cities.
However, median home prices – not included in the CPI measure – continue to rise due to the combination of very strong demand for housing and limited supply of homes of sale. Housing supply was limited before the pandemic and is even more limited now. Specifically, at the local level, 2 in 3 metro areas experienced double-digit price gains while home prices rose 5.1% nationwide in October compared to September. As a result, the housing shortage is driving prices up faster than inflation and wage growth eroding affordability for homebuyers. On the other side, owners and sellers are able to increase their home equity, in terms of wealth creation due to price growth. For the typical home, equity increases by $16,000 from a 5% increase in home prices.