Real Impact: What The May CPI Report Means for Rental Housing

What Happened: 

The consumer price index (CPI) rose 0.1% month-over-month and 2.4% year-over-year in May, below expectations, indicating that disinflationary momentum persists despite concerns about the potential cost pressures from the administration's tariffs.

Shelter rose by 0.3% from April and continued to be a key driver of inflation pressures. Meanwhile, core-CPI, which excludes the more volatile food and energy, also rose by 0.1% from April, but is slightly above headline inflation on an annual basis at 2.8%. Weakening energy prices helped offset a 0.3% increase in food prices.

Impact on Interest Rates:

Forecasts for the June FOMC policy meeting were barely changed, with projections of no rate change dominating estimates for the past several weeks. According to the Chicago Mercantile Exchange's Fed Watch Tool, on June 10th, the rate was 97.3%.% chance of rates being held unchanged at 4.50-4.75%, which consolidated to 99.9% following the CPI release on Wednesday, June 11th.

Looking ahead to year-end interest rate projections, the lower-than-expected May inflation data widened the chances of several rate cuts in 2025, but only marginally. Prior to the release of the May CPI report, futures markets were pricing in a 61.5% chance of at least two rate cuts by the end of 2025. Following the CPI release, there is now a 67.2% chance of at least two rate cuts. While the probability of two or more rate cuts has shifted higher, it remains well below the 78.8% probability that it hit one week ago, just prior to the latest jobs report release.

What it Means for Rental Housing:

Shelter continues to be a primary driver of monthly inflation, rising 0.3% from April; however, the 3.9% annual increase in shelter prices is its lowest annual rate since late 2021. For renters, the long-awaited moderation in rent price inflation appears to be taking hold. Meanwhile, operators may be entering a more competitive landscape, but slowing inflation will also ease cost pressures on property expenses. The modest increase in the likelihood of multiple Fed rate cuts is a positive signal for borrowing and capital spending. Still, the stagnating trend of both prices and employment leaves the path of monetary policy highly uncertain.