One of the biggest obstacles plaguing the Fed's fight against inflation has been the surprising buoyancy of the $50 trillion housing market, typically one of the most interest-rate-sensitive sectors of the economy. A historic supply shortage has kept prices high despite rising mortgage rates, and high home prices have put upward pressure on rents. That matters because housing makes up about one-third of the closely watched Consumer Price Index — a key inflation gauge that will help inform the Fed’s decision on when to cut interest rates. The Labor Department on Tuesday releases the February CPI numbers, and another high reading could fuel concerns that the central bank will delay plans to cut interest rates. But some experts are holding out hope that the reading will finally reflect an easing of shelter prices. “I think it will be a little calmer,” said Lawrence Yun, chief economist at the National Association of Realtors. “I think overall the heavy weight, shelter, will continue to decelerate.” The issue lately has been that even as rents have finally begun to level off, the shelter portion of CPI — which accounts for average rents and home prices — still shows them climbing significantly. Rents were up nationally about 3.4 percent in January over the previous year, according to Zillow. But the official measure of the cost of shelter rose 6 percent from a year earlier in January, driving much of the increase in that month’s higher-than-expected overall CPI reading of a 3.1 percent annual increase in prices. CPI’s shelter gauge typically lags real-time measures in part because leases are renewed annually, so changes in asking rents take a while to cycle into the official data. Falling food or energy prices are easier to track more closely. “This is fairly unique, the current environment, where the private-sector data is really not matching up with the government data by this large margin,” Yun said. So when will the slowdown in rents show up in the official data? “We’re probably going to have to wait another year or two to see big rent disinflation show up in the CPI – and that’s if asking rent growth doesn’t pick up again because of upward pressure on single-family prices,” said Orphe Divounguy, senior economist at Zillow. “Unless we see a continued increase in the supply of housing, the pressure on rent growth will stay there, and we may not see the continued rent disinflation that we’re hoping for,” he added. Yun expects a quicker leveling off: “I think it’s going to be in the 5s in the upcoming months, and steadily trend towards very low single digits — 1 or 2 percent — by late summer,” he said. The National Association of Home Builders expects the shelter gauge “to ease if for no other reason than that there are roughly 1 million apartments under construction, and this will represent a significant increase in housing supply, lowering rent growth when they go under lease,” said Robert Dietz, chief economist at NAHB. “We’ll see an uptick in units starting the middle of this year through the middle of 2025.” Fed Chair Jay Powell said last week the central bank needs “just a bit more evidence” that inflation is on the path toward 2 percent in order to lower rates. (The Personal Consumption Expenditures price index — the gauge the Fed watches most closely — gives less weight than the CPI to housing, which typically represents 18 percent of core PCE.) In the meantime, the Fed’s rate hikes may actually be keeping shelter inflation higher, Dietz said, by driving up the cost of loans to acquire land, develop lots and construct homes. “Just thinking about it from a housing perspective, increasing interest rates can actually harm the supply side,” he said. “The impacts of elevated interest rates from a year or two ago are going to have lingering effects over the next two to three years.” It’s Tuesday — Send tips to zwarmbrodt@politico.com.
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