Sustained shelter inflation at high levels will limit any decline in U.S. CPI.
Owners' equivalent rent, which makes up a third of U.S. CPI, will likely rise to 7% on the year by next April based on current single-family home rental price trends, Selma Hepp, an economist with real estate data provider CoreLogic, told MNI.
That acceleration in the rent measure will likely keep CPI elevated through the spring, she said in an interview this week. OER for the 12 months ending in May was 5.1%, the largest increase since 1991.
Because a typical lease lasts a year, only a fraction of the BLS's monthly sample of rent prices has seen a recent adjustment to market rental rates. According to a CoreLogic analysis, OER lags by about 12 months the company's single-family rent index, which showed a 14.5% year-on-year rise in rents in April.
Fannie Mae chief economist Doug Duncan also told MNI this week a rise in housing costs could make it harder to avoid more drastic monetary tightening. (See: MNI INTERVIEW:Housing Cost Lag to Drive Inflation As Fed Hikes)
"We may see a few more months of single-family rent increases," Hepp said. "While I do anticipate higher mortgage rates will slow rents, we won't really see rents falling until later this year."
ROBUST HOUSING DEMAND
The FOMC marked up the forecast for its preferred price measure, PCE inflation, to 5.2% this week after several inflation reports surprised to the upside. It also lifted its benchmark fed funds rate to a 1.5%-1.75% target range and said rates could end the year close to 3.4%.
Hepp expects some dampening of increases in single-family rents as mortgage rates rise briskly because the data do not clearly indicate people are substituting rent for home ownership.
Rent increases have been strongest in higher price tiers. "It has to do with migration patterns during Covid," she said. "We continue to see people out-migrating from New York down to markets in Florida and the southeast, for example."
Strong real demand from Millennials raising young families, combined with low housing stock "may play out favorably for the existing homes market" despite Fed tightening, Hepp said. "We do project home sales to decline in 2022, but our forecast for prices is double digit growth slowing to 5% a year out."
"I don’t foresee a recession, and even if there is one, it's not likely to be a deep one."