The Cooler Housing Market is Finally Pushing Down Inflation
Key Takeaways:
– Rents, which surged in the aftermath of the pandemic, started to cool down in 2022.
– The slowdown is finally being reflected in official inflation measures such as the Consumer Price Index. Fresh CPI data is due for release Wednesday morning.
– Should the cooler housing trend continue, it could bolster the case for the Federal Reserve to lower its benchmark interest rate in September.
Shelter costs were once a main driver of inflation. That may finally be changing, with Wednesday’s CPI report for July set to offer fresh clues that could inform the outlook for interest rates.
Home prices and rent soared during the pandemic as high demand for housing ran headlong into consumers relatively flush with cash because of government stimulus programs and ultra-low mortgage rates.
Rental increases stabilized in early 2022 after the Federal Reserve started raising interest rates to combat inflation. That change was slow to be reflected in the widely-watched Consumer Price Index since changes in asking rents typically take a year or more to show up in CPI measures of housing costs.
Shelter costs rose 0.17% in July, the smallest increase since January 2021 according to last month’s CPI report. Because housing is such an important part of the overall measure of inflation, that moderation helped push the annual rate down to 3%.
Many economists expect the trend to continue in Wednesday’s highly anticipated report on July inflation.
Lower Rent Inflation Could Encourage a Rate Cut
If official inflation measures continue to show a cooling of rent prices, it could augment the case for the Fed to lower its benchmark fed funds rate at its next meeting in September.
“Given the sharp deceleration in rental inflation, much of the focus will be on whether or not the more normal prints in the June data will repeat themselves,” Justin Weidner and other economists at Deutsche Bank wrote in a commentary. “Given that the regional rent data did not seem to exhibit any anomalies and leading indicators are constructive, we expect that to be the case.”
The cooling down of the housing market and the moderation of rental inflation could have significant implications for the Federal Reserve’s decision-making. Lower rent prices would alleviate some of the concerns about rising inflation and could provide the central bank with the justification to lower its benchmark interest rate in September.
A rate cut could stimulate economic growth and provide relief to consumers who have been grappling with rising housing costs. It could also support the housing market by making mortgages more affordable and encouraging homebuyers.
However, it’s important to note that the housing market is just one factor influencing inflation. Other components, such as energy prices and supply chain disruptions, also play a significant role. Therefore, the Federal Reserve will need to consider a wide range of factors before making any decisions regarding interest rates.
In conclusion, the cooling down of the housing market and the moderation of rental inflation are positive developments for consumers and the overall economy. The upcoming CPI report for July will provide further insights into the state of inflation and could influence the Federal Reserve’s decision-making. If rent prices continue to cool down, it could strengthen the case for a rate cut in September, providing relief to consumers and supporting economic growth.
