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Shelter inflation

  1. Current State of Shelter Inflation: Shelter inflation has remained elevated even as other forms of inflation have diminished. This is significant because shelter accounts for about 30% of the Consumer Price Index (CPI) basket.

  1. Relationship with House Prices and Rents: Although house prices and rents have slowed sharply, shelter inflation in the CPI has continued to grow. The relationship between these elements is complex and not always straightforward.

  1. Forecasting Models and Predictions: By using a blend of various market indexes and applying a dynamic statistical model, the authors forecast that shelter inflation is likely to slow significantly over the next 18 months. The forecast includes a wide range of possibilities, with year-over-year shelter inflation by late 2024 estimated to fall anywhere from –9% to about 2%.

  1. Challenges in Forecasting: There are caveats to these forecasts, including the uncertainty in the data, the unusual economic environment of the pandemic, and the lack of accounting for potential future shocks.

  1. Impact of Monetary Policy: The rapid rise in interest rates since early 2022 appears to have had a noticeable effect on slowing the housing market, and this slowdown is expected to continue. This reveals the intricate connection between monetary policy and housing markets.

  1. Implications for Overall Inflation: The forecasts suggest that shelter inflation may decline considerably, lessening the pressure on overall inflation. This information is vital for policymakers who are addressing the broader inflationary pressures in the economy.

My takeaway.... The key is a predictive slowdown in shelter inflation. rapid rise in interest rates and slowing housing markets, the risk of surprise increases in shelter inflation has become significantly smaller.
SF Fed
Where Is Shelter Inflation Headed? - San Francisco Fed
Shelter inflation has remained high even as other components of inflation have fallen. However, various market indicators, including house prices and rents, suggest that the housing market has slowed significantly with the rise in interest rates. Forecasting models that combine several measures of local shelter and rent inflation can help explain how recent trends might affect the path of future shelter inflation. The models indicate that shelter inflation is likely to slow significantly over the next 18 months, consistent with the evolving effects of interest rate hikes on housing markets.

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