Progress on disinflation has largely stalled so far in early 2024 data, that’s after steady improvements since mid 2022. That’s a problem for the Federal Open Market Committee’s plans to bring rates down from current peak levels of 5.25% to 5.5%. Rates have held at that level since July 2023.
Currently, one or two interest rate cuts are expected in 2024. Previously fixed income markets projected three or four cuts as more probable. Single data points are seldom critical to the FOMC’s thinking, but April’s Consumer Price Index release may prove important. Within that shelter costs have a key role to play. If FOMC policymakers aren’t convinced that inflation is trending back to a 2% annual rate, then interest rate cuts may be delayed later into 2024 or perhaps beyond.
April CPI
The April CPI release will come on May 15. That’s after the FOMC’s next meeting concludes on May 1, but no move in interest rates is anticipated then. The FOMC wants to see inflation cool after successive monthly increases of 0.4% in February and March. Ideally a monthly increase of 0.2% or less might reassure the FOMC that inflation’s on track to reach 2%.
Unfortunately, that may not happen. Nowcasts of inflation from the Cleveland Federal Reserve estimate that April CPI may once again come in at 0.4%. If this recent string of 0.4% inflation readings continues, annual inflation will be on track for an 5% annualized rate. That’s not what the FOMC is looking for.
Shelter Prices
If there’s one item to watch within the CPI series, it’s shelter prices. This category carries a large weight, contributing 36% of the CPI reading and increased at a 5.7% annual rate to March 2024. Hence more that half of the current 3.5% CPI inflation to March 2024 is due to the contribution of rising shelter costs.
There’s a lot of statistical complexity with the CPI shelter cost data. A panel approach is used, which means more properties are sampled, but introduces a statistical lag into the CPI’s shelter cost figures.
That might be a reason for optimism, industry sources such as Rent.com and the Zillow Observed Rent Index signal lower rates of shelter cost inflation. For example Zillow estimates 3.6% to March 2024, compared to the CPI’s 5.7%.
Regional Variation
However, there is regional variation. Rental prices in the Northeast and Midwest are rising faster than average. Rents rose at at 4.4% annual rate in New York and 5.5% in Chicago according to Zillow data to March 2024.
In contrast on the west coast and south rental prices are cooler. For example, annual rental prices are up 2.5% in Los Angeles and 1.7% in Las Vegas. Certain Texas markets, such as Austin and San Antonio are seeing rental prices declines according to Zillow data.
This matters because if shelter costs converge to what industry sources are currently reporting, then that may be sufficient to give the FOMC confidence that 2% annual inflation is achievable.
However, this disconnect between CPI figures and industry estimates regarding rental prices has existed for many months now, so the timing of any convergence remains uncertain.
It’s also important to note that the statistical effects cut both ways, industry measurements of rental price inflation peaked at much higher levels than the CPI estimated in 2022.
What To Expect
Current assessments are that April’s CPI reading may fail to bring FOMC policymakers comfort that inflation is on track to reach 2%. However, if inflation readings do ease, then it’s likely that shelter costs will be a key contributor. There are reasons for optimism based on industry rental price data. Yet, when and if CPI figures mirror these trends remains unclear.
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