By Megan Leonhardt
All eyes will be on how much further higher gasoline prices will drive up inflation again in April when the consumer price index is released Tuesday morning, but it's the housing component of the report that investors need to watch.
Core inflation -- which excludes food and energy prices -- has been running behind headline inflation in recent months, even before gasoline prices started their meteoric rise in the wake of the Iran war. Because core inflation is considered a better gauge of price growth trends, this has provided some optimism that the U.S. is trending closer to the Federal Reserve's 2% target than the headline figures would suggest.
Those cooler readings, however, are largely the result of softer housing inflation, which is made up of rents and the owners' equivalent of rent (OER) -- a measure of what homeowners would hypothetically pay if they rented their homes. In fact, housing accounts for roughly 40% of the core CPI basket excluding used car prices.
Yet those crucial softer readings are likely to dissipate in April due to data distortions carried over from the 43-day government shutdown in 2025. During that funding lapse, there was no CPI data collected in October, which meant that BLS staff penciled in a zero for that month's housing inflation. And unlike many prices collected in the CPI, rent and OER are based on survey panels that are conducted every six months. So that distorted data has been hanging around until April, when the data from the latest housing panel survey will be added in.
Economists expect that this distortion could lead to shelter costs accelerating in April. Over the last three months, shelter has added on average about a tenth to core inflation. In the April data, Omair Sharif, founder of Inflation Insights, estimates housing will probably add more like a 0.25 percentage point increase month over month. "So it's a pretty big jump--more than double what it's been doing the last couple of months," Sharif says.
Digging into the details, Zillow's Treh Manhertz estimates that OER will be running at 0.44% in April, translating into a 3.2% gain annually. He expects rents will rise 0.39% month over month, adding up to a 2.6% annual advance.
Overall, economists surveyed by FactSet currently estimate that core CPI rose 0.4% month over month in April and increased 2.7% year over year. That would be an advance from March's 2.6% annual gain.
Many economists like Manhertz expect that once the April correction is in place, housing inflation will continue to cool as the year progresses. Zillow estimates that the CPI's index of rent of primary residence will rise 2.39% over 2026, a substantial slowdown from the 2.92% gain logged last year.
In fact, the path back to the Fed's 2% target is heavily reliant on cooling housing inflation. But that may not be enough. James Egelhof, BNP Paribas' chief U.S. economist, says that while he expects continued gradual cooling in rents and in OER to put some continued downward pressure on overall core inflation, it likely won't be enough to address the sources of heat that are coming in from other sources, such as tariffs.
"There is an offset coming from rents, but we expect that to just not be quite enough to get inflation back down to target -- even far out in the future," Egelhof says. The economy has been through several large, successive shocks to inflation that have produced a lot of economic and price volatility. That's causing prices to simply have more momentum than they've had in the past, he adds.
And housing inflation may not cooperate. Alternate rent indicators do show that rents are softening. But most focus on growth in the price of new leases. That's a bit different from the CPI's calculation of rent prices, which heavily skews toward continuing rents, Sharif says. And there is some evidence that continuing rents are not going to cool much more. In fact, real estate investment trusts (REITS) like UDR and Mid-America Apartment Communities ( MAA) have reported solid new lease gains on continuing tenant rents in late 2025, and that momentum has continued into 2026.
"We're getting into a much tougher stretch where the marginal reduction inflation that was coming from shelter is slowing," Sharif says. "We have seen big, big reductions in shelter inflation in the last couple of years, but the magnitude of that change is slowing, and it's going to keep slowing."
That could pose problems for Fed policymakers, many of whom have already raised concerns about the potential for stickier-than-expected inflation in the coming months. If housing inflation doesn't cooperate, it leaves officials without much hope that inflationary pressures can be tamed in the near-term.
Write to Megan Leonhardt at megan.leonhardt@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
May 11, 2026 06:03 ET (10:03 GMT)
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