MNI: Fed's Waller: Higher Rents Call for Tighter Policy

Some of the pandemic-specific factors pushing up U.S. home prices and rents could begin to ease in the next year, but rent inflation could double this year as the CPI catches up to the current market, adding to arguments for tighter monetary policy, Federal Reserve Governor Christopher Waller said Thursday.

Housing services represent about 15% of PCE inflation and an even larger share of CPI, Waller said. Rents have risen 6.5% since January 2020, according to prices tracked under CPI, but that likely doesn’t fully reflect the extent to which rents have grown, Waller said.

"Based on various measures of asking rents, some recent research suggests that the rate of rent inflation in the CPI will double in 2022. If so, rent as a component of inflation will accelerate, which has implications for monetary policy," he told a real estate conference.

Lumber prices, which have skyrocketed during the pandemic, are set to ease, and new builds rose to their highest last year since 2007. But over the long run, strong demand, labor shortages and regulatory limits on construction are set to send housing costs higher, keeping up pressure on overall inflation, Waller said.

Fed Board researchers also estimate the marginal effect of the Fed's billions of dollars of agency MBS purchases during the pandemic lowered mortgage rates about 40 bps, which helped dampen the costs of rising house prices during that period. The Fed brought those purchases to an end earlier this month.