High Rents
Stalled inflation this year hasn’t derailed the Federal Reserve’s plans to eventually cut interest rates. That’s because it expects a slowdown in housing costs to eventually drag inflation close to its 2% target.
The problem: It has been waiting for that slowdown for 1½ years now, and it still hasn’t arrived. The slowdown might simply be delayed. But some analysts worry it’s not going to happen because of changing dynamics in the housing market. If so, that would significantly weaken the case for lower rates.
Housing has played a large role in the inflation of recent years because its cost rose so much and carries such large weight. It is one-third of the consumer-price index and around one-sixth of the price index of personal-consumption expenditures, the Fed’s preferred inflation measure.
It is also, in theory, predictable. Government statisticians don’t use home prices to calculate inflation because a home is partly an investment. Instead, they use monthly rents to capture what tenants pay to rent a house or apartment, and what a homeowner would in theory pay to rent her own home.
