These shifts in work flexibility, home size and cultural norms are working together to make household formation more sensitive to economic conditions than in the past. On top of that there are a record number of housing units under construction, rising to 1.71 million from less than 1.2 million before the pandemic.

Rising interest rates are likely to slow construction but with apartment demand already showing signs of rapidly cooling, the net effect is that new homes are likely to run well ahead of household formation for the next year or two. That will bring down rents and overall core inflation. It will take some time for this to all show up the consumer price index data given the way the government calculates the data, but given the current softening trajectory of real-time measures like the Zillow Rent Index, expect CPI shelter inflation to peak soon, maybe as soon as early next year.

How shelter inflation falls will depend on how firmly the Fed is able to restrain the economy. If it decides to raise its key rate to around 4.5% to 4.75% and then pause, my guess is that it would be enough to get shelter inflation back down to the 2% to 3% range by early 2024. That’s hardly a backfire.

Karl W. Smith is a Bloomberg Opinion columnist. Previously, he was vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina.

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