If Trump desires to curb inflation, the very first thing he has to do is construct extra homes

Homes under construction in Englewood Cliffs, New Jersey on November 19, 2024.

Adam Jeffery | CNBC

If President-elect Donald Trump wants to bring inflation back to more bearable levels, he will need help with housing costs, an area over which federal policymakers have limited influence.

November's consumer price index report contained mixed news on the protection front, which accounts for a third of the closely tracked inflation index.

On the one hand, the category recorded its lowest full-year increase since February 2022. Additionally, two key rent-related components within the metric recorded their lowest monthly increases in more than three years.

On the other hand, the annual increase was still at 4.7%, a level that, excluding the Covid era, was last reached in mid-1991, when CPI inflation was around 5%. According to the Bureau of Labor Statistics, housing contributed about 40% of the monthly increase in the price measure, more than the cost of food.

With the CPI annual rate now up to 2.7% – 3.3% excluding food and energy – it is not clear whether inflation will consistently and convincingly return to the Federal Reserve's 2 percent target, at least not until the Real estate inflation continues to ease.

“It would be expected that we would see slower year-over-year rent growth over time,” said Lisa Sturtevant, chief economist at Bright MLS, a Maryland-based listing service that covers six states and Washington, DC . But it just feels like it's taking a long time.

Still rising, but not as fast

In fact, housing inflation has fallen slowly and unevenly since its peak in March 2023. Similar to the overall CPI, the housing components continue to rise, albeit at a slower rate.

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

A particular focus of policymakers has been on rents, and here too the news has been mixed.

According to real estate market site Zillow, the average nationwide rent was $2,009 a month in October, down slightly from September but still 3.3% higher than a year ago. Rents have risen about 30% nationally in the last four years.

Housing costs also continue to rise, a situation exacerbated by high interest rates that the Federal Reserve is trying to lower.

Although the central bank has cut its key interest rate by three-quarters of a percentage point since September and is expected to cut another quarter point next week, the typical 30-year mortgage rate has actually risen about as much as the Fed cut over the same period.

All of these converging factors pose a potential threat to Trump, whose other policies such as tax cuts and tariffs will exacerbate the inflation problem, according to some economists.

“We know that some of the initiatives proposed by the president-elect are quite inflationary, so I think the prospects for further progress toward 2% are less certain than they were six months ago,” Sturtevant said. “I don’t feel like I was compelled to do this by anything specific that suggests the federal government can meaningfully address the supply issue, especially not in the short term.”

Optimism for the moment

During the presidential campaign, Trump made deregulation a cornerstone of his economic policy, and that could impact the real estate market by opening up federal land for construction and generally lowering hurdles for homebuilders. Trump has also been a strong supporter of lower interest rates, although monetary policy is largely outside his purview.

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

Sentiment on Wall Street was generally optimistic about real estate.

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

Still, lodging spending “continues to be the primary source of higher prices, and that the rate of increase has slowed is no consolation,” said Robert Frick, corporate economist at Navy Federal Credit Union.

That could spell trouble for Trump, who faces a potential quandary that will make it difficult to reduce the housing burden.

“We will not lower rates until the cost of accommodation comes down. But accommodations cannot be reduced until rates are lower,” Sturtevant said. “We know there are some wild cards out there that we might not have talked about two or three months ago.”