If Trump wants to eliminate inflation, the first thing he needs to do is build more homes

If President-elect Donald Trump wants to push inflation to a more tolerable level, he will need help from housing costs, an area where federal policymakers have only limited influence.

The November CPI report contained mixed news on housing, which accounts for a third of the closely watched inflation index.

For one thing, this category posted its smallest full-year increase since February 2022. Furthermore, two key rent-related components within the measure saw their smallest monthly gains in more than three years.

But on the other hand, the annual rise was still 4.7%, a level last seen, excluding the Covid era, in mid-1991 when CPI inflation was around 5%. Housing contributed about 40% of the monthly increase in the price measure, according to the Bureau of Labor Statistics, more than food costs.

With the annual CPI rate now at 2.7% – 3.3% excluding food and energy – it is not clear that inflation is heading steadily and convincingly toward the Fed's 2% target, at least not until housing inflation declines further.

“The expectation is that over time, we will start to see slower rent growth on an annual basis,” said Lisa Sturtevant, chief economist at Bright MLS, a Maryland-based listing service that covers six states and Washington, D.C. It seems like it's taking a long time, though.”

In fact, housing inflation has been on a slow and erratic downward journey since it peaked in March 2023. As with the overall CPI, shelter components continue to rise, albeit at a slower pace.

The housing problem has been caused by the constant cycle of supply outstripping demand, a condition that began in the early days of Covid and has yet to be resolved. Housing supply in November was about 17% below its level five years ago, according to Realtor.com.

Rents have been a particular focus of policymakers, and the news there has also been mixed.

The national average rent in October 2009 was $9 per month, down slightly from September but still 3.3% higher than a year ago, according to real estate market site Zillow. Over the past four years, rents have risen by about 30% nationally.

Looking at housing, costs also continue to rise, a situation exacerbated by rising interest rates that the Fed is trying to lower.

Although the central bank has cut its benchmark borrowing rate by three-quarters of a percentage point since September, and is expected to cut the rate by another quarter of a percentage point next week, the typical interest rate on a 30-year mortgage has actually risen by the same amount. Which the Fed rose. Cut during the same time frame.

All the converging factors represent a potential threat to Trump, whose policies, such as tax breaks and tariffs, some economists expect will exacerbate the inflation dilemma.

“We know that some of the initiatives proposed by the president-elect are quite inflationary, so I think the prospects for continued progress toward 2% are less certain than they were six months ago,” Sturtevant said. “I don't feel compelled to do anything in particular to suggest that targeting the supply issue is something the federal government can do meaningfully, certainly not in the short term.”

During the presidential campaign, Trump made deregulation a cornerstone of his economic platform, and he could extend this to the housing market by opening up federal lands for construction and generally lowering barriers to homebuilders. Trump has also been a strong supporter of lowering interest rates, even though monetary policy falls largely outside his purview.

Trump's transition team did not respond to a request for comment.

The mood on Wall Street was generally upbeat about the housing picture.

“Rents may finally normalize to levels consistent with a 2% inflation rate,” Stephen Juneau, an economist at Bank of America, said in a note. November housing data “will be viewed as encouraging at the Fed,” economist Krushna Guha, head of central bank strategy at Evercore ISI, wrote.

However, shelter expenses “remain the No. 1 source of price increases, and a slowing rate of increase is not comforting,” said Robert Frick, a corporate economist at Marine Federal Credit Union.

This could cause trouble for Trump, who faces a potential impasse that would make alleviating the housing burden difficult.

“We won't cut prices until shelter costs go down,” Sturtevant said. “But you can't cut shelter until prices go down.” “We know there are some wild cards that we probably didn't talk about two or three months ago.”