U.S. headline shelter inflation is set to cool markedly and could even turn negative next year, the Federal Reserve Bank of San Francisco said in a research note published Monday, as the central bank’s rate hiking cycle takes its toll on the broader housing market.
“Our baseline forecast suggests year-over-year shelter inflation will continue to slow through late 2024 and may even turn negative by mid-2024,” San Francisco Fed economists Augustus Kmetz, Schuyler Louie, and John Mondragon wrote.
“This would represent a sharp turnaround in shelter inflation, with important implications for the behavior of overall inflation,” they added, as shelter inflation represents the biggest component of the consumer price index.
Using the Case-Shiller Home Price Index, in addition to measures of asking rents generated by CoreLogic, Zillow (Z) (ZG) and Apartment List, the economists built a model to determine the path for the shelter component. Results from the model show the Fed’s rate hikes that have persisted almost every month since March 2022 “have had a significant effect on slowing housing markets, and this slowdown is likely to continue going forward.”
Headline inflation has slowed significantly since peaking at a four-decade high last summer, with CPI now up just 3% Y/Y in June. Still, July’s figures due out on Thursday are expected to reaccelerate slightly.
Stripping out volatile food and energy prices, core CPI has been more stubborn in its descent, prompting speculation that more rate hikes would be needed to lower overall inflation to the Fed’s 2% objective. But, taking the San Francisco Fed’s study into account, the good news is more than 40% of the core CPI basket is made up of shelter.