Housing Inflation Eases, Boosting Hopes for Interest Rate Cuts
The latest Consumer Price Index (CPI) report brings welcome news for the Federal Reserve, as housing inflation pressures continue to moderate. According to the Bureau of Labor Statistics, shelter costs rose 4.6% year over year in December, the smallest 12-month increase since January 2022.
A Key Indicator for the Fed’s Next Move
This easing of housing inflation could play a significant role in determining the path of interest rate cuts as the Fed deliberates its next policy decision later this month. As Fed Chair Jerome Powell has repeatedly emphasized, market rates have come down for new leases on apartments, but inflation measures are still reporting the lagged effects of prior increases.
Rent and Owners’ Equivalent Rent on the Rise
The index for rent rose 0.3% in December, a slight pickup from November’s pace of 0.2%. Meanwhile, owners’ equivalent rent also slightly accelerated, rising 0.3% for the month, up from November’s 0.2% gain. These gains were counteracted by a drop in the lodging away from home index, which fell 1% in December after rising 3.2% in November.
Experts Weigh In
Morgan Stanley analyst Michael Gapen notes that rents accelerated but remained below the prior 6-month average, and expects continued progress ahead as new-lease inflation remains below CPI housing. Jeff Schulze, head of economic and market strategy at ClearBridge Investments, emphasizes that the easing shelter inflation narrative remains intact, with price levels holding steady at 0.3%. Progress on this front should be closely monitored as it is a key driver for bringing inflation closer to the Fed’s 2% target.
Implications for the For-Sale Housing Market
The moderation of housing inflation could have significant implications for the for-sale housing market. As National Association of Realtors chief economist Lawrence Yun notes, “The conquering of inflation will be a key factor in bringing down the mortgage rates, which so far have refused to budge even as the Federal Reserve has been cutting other interest rates.”
Broader Consumer Price Trends
Broadly, consumer prices rose 0.4% over the prior month in December, up from November’s monthly 0.3% gain, and on par with economists’ expectations. However, core inflation, which strips out volatile categories such as food and energy, decelerated. As the Fed continues to navigate the complex landscape of inflation and interest rates, this latest report provides a glimmer of hope for a more stable economic future.
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