The Federal Reserve’s attempt to get a clean read on post-pandemic inflation has focused attention on gauges that elevate housing costs, which is why what happens to rental inflation will factor heavily into the future of monetary policy.
The good news is rental inflation may be close to topping out after advancing almost 6% in the 12 months through July. The bad news is it will take a while to settle back down to anything resembling pre-coronavirus norms.
And that means Fed officials will maintain high interest rates for some time.
“If you’re the Fed and you’re trying to push down on inflation, you have to sort of hammer the labor market a little bit, in the sense that that’s what is going to help push shelter inflation down,” said Omair Sharif, president of Inflation Insights in Pasadena, California. Most other prices, meanwhile, are “out of their control,” he said.
A monthly Labor Department report on consumer prices due out Tuesday is expected to show so-called core inflation, a widely tracked measure that excludes volatile food and energy prices, rose by another 0.3% in August after a similar increase in July.
While that would mark a slowdown versus the past year, it would still be elevated compared with the years before the pandemic. Nor is it likely to sway the Fed from delivering a third straight 75 basis-point rate hike when it meets Sept. 20-21.
“I expect to see sizable increases in this component of inflation for a while as the recent rise in new rentals makes its way into aggregate price measures,” Fed Governor Chris Waller said on Friday. “Sometime early next year, though, I expect to see the upward pressure on inflation from these forces to ease.”
Outsize Share
Rents have always been important in measures of inflation, due to their outsize share in most household budgets: They comprise a little over 30% of the headline consumer price index, and about 40% of the core index.
But during the pandemic, as inflation has surged, other, smaller components -- like used vehicles -- recorded such unprecedented price increases that they, too, have become major drivers of those measures.
So, in an attempt to get a better handle on underlying inflation, policy makers have increasingly turned to such measures as “trimmed-mean” and “median” indexes to get a sense of how “broad-based” inflationary pressures really are.