Powell May Be Waiting Until 2026 for Housing Inflation to Cool

Federal Reserve Chair Jerome Powell said last week central bankers are keeping a close eye on housing inflation, which “has yet to fully normalize.” They could be waiting more than a year.

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Published Nov 18, 2024  •  2 minute read

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(Bloomberg) — Federal Reserve Chair Jerome Powell said last week central bankers are keeping a close eye on housing inflation, which “has yet to fully normalize.” They could be waiting more than a year.

It may take until mid-2026 for rent inflation in the consumer price index to subside toward its pre-pandemic norm, according to research by the Cleveland Fed. While several measures suggest that new rents in particular are coming down, fewer people are moving and signing new leases — so the sample in the CPI doesn’t capture as much turnover, the researchers said.

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Shelter is the largest category in the CPI, and it accounted for more than half of the October monthly advance. Should the gauge remain elevated for another year-and-a-half as the Cleveland Fed projects, it will pose a challenge to policymakers who cite progress on inflation as a key argument to lower interest rates.

“The optics of rising inflation, even if lagged data like rent, make communication more challenging, which ultimately could make it harder to cut rates,” said Omair Sharif, president of Inflation Insights LLC. “We already had one dissent, and I think arguing for continued cuts in the face of rising CPI inflation could draw more.”

Sharif was referring to Michelle Bowman, who voted against the Fed’s half-point cut in September in favor of a smaller reduction — marking a rare dissent for a Fed governor, let alone anyone in Powell’s tenure. Central bankers unanimously decided to cut rates by a quarter point this month, but the outlook for December and beyond is less certain.

Powell, who spoke last week at an event in Dallas, said the strength of the US economy gives officials room to lower borrowing costs “carefully.” He said it would be smart to proceed slowly with rate cuts if the economic data allow.

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Granted, the Fed targets inflation based on a separate gauge, the personal consumption expenditures price index. It doesn’t place as much weight on shelter, partly why it’s trending closer to officials’ 2% goal. But the PCE draws from the CPI to calculate its own housing measures, so the lag could affect both metrics.

“If it were to trend up in a way that 3% could be breached, then I think that would seriously complicate things,” said Michael Feroli, chief US economist at JPMorgan Chase & Co. 

He was referring to the core PCE gauge, which excludes food and energy, and rose 2.7% in the year through September. Economists expect it to tick up to 2.8% when October data are released later this month.

CPI Calculation

The CPI is designed to measure inflation for the average consumer and samples rent increases for all renters, whether they’re re-signing an existing lease or entering a new one. Though current metrics from Zillow Group Inc. and Apartment List show rent growth has subsided, or even declined, in recent months, the CPI tends to follow those trends with a lag.

The Cleveland Fed paper, which was published last month, presents another complication — the authors found that declining mobility in the US is compounding the delay. So rent inflation will be more sticky since there are fewer people added to the new renter mix.

“There is intense policy interest in and a high amount of uncertainty about the future path of rent inflation,” they wrote.

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