Federal Reserve officials are still forecasting rate cuts later this year as they track real-time data suggesting inflation will continue to drift downward. But there’s no guarantee how quickly that disinflation will show up. We’ll find out if we’re getting there in this morning’s consumer price index report. Data from sources like Apartment List suggest that rents have fallen significantly in the past year, but shelter costs continue to be one of the biggest drivers of higher inflation because it takes a while for new leases to feed into official inflation data. (Each unit is only surveyed every six months, and people renewing their leases might not see as big a shift as those who are moving.) “There’s some confidence that the lower market rent increases that we’re seeing will show up in measures of housing services inflation over time,” Fed Chair Jerome Powell told reporters last month. “There’s a little bit of uncertainty about when that will happen, but there’s real confidence that they will show up eventually over time.” That anticipated boost from housing is one reason why the Fed is still hopeful about rate cuts. But they could get help from other sectors as well. Omair Sharif, president of Inflation Insights, told MM that private-sector measures of new vehicle sales show average prices are down several thousand dollars, “so there’s catchup left in CPI.” Inventories are up a lot too, he said — meaning there are plenty of cars around to sell — which should keep putting downward pressure on prices and help push down goods inflation. Sharif said he was optimistic that lower car prices and leveling off in auto repair costs might then reduce auto insurance prices, which would help lower services inflation, though he acknowledged that’s not guaranteed. Fed officials have also made clear that they’re hoping to see some softening in services inflation because wage growth has slowed, putting less pressure on labor-intensive industries like restaurants to keep raising prices. The consensus estimate among economists is that inflation, as measured under CPI, rose 0.3 percent from February to March (and 3.4 percent over the past 12 months), but Pantheon Macro said there’s a solid chance it could come in at 0.2 percent instead, which would put the prospect of a Fed rate cut in June more firmly on the table. The key question, though, is how much more disinflation is really coming. In late 2022, Fed officials were seeing signs that prices were cooling, even though it wasn’t showing up in CPI yet, and were ultimately rewarded over the next year with steadily falling inflation. Who can say if something similar will happen this year? As Irish singer-songwriter Enya would say, only time. Happy Wednesday — Send tips to zwarmbrodt@politico.com and keep up with Victoria at vguida@politico.com and @vtg2.
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