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MNI INTERVIEW: CPI Rent Passthrough May Be Longer - Detmeister

Photo by Saru Robert on Unsplash

Resilient shelter costs that surprised to the upside in December could make housing inflation more persistent, though a broad-based inflation slowdown that continued in the latest CPI report could foreshadow an earlier Federal Reserve pause in its interest rate increases, ex-Fed board economist Alan Detmeister told MNI.

"Rents were very strong and it's a bit of a concern for the next two or three months, maybe even into the early part of the summer," he said in an interview. "We're seeing inflation clearly slowing not only here but average hourly earnings is suggesting that as well and the Atlanta Fed wage tracker ticked down too."

Detmeister said CPI rents don't change the long run inflation outlook even though the passthrough from market rents to the CPI could be longer than previously anticipated.

"For the Fed in particular their monetary policy should not be driven by what they expect inflation to be over the next few months. It should be driven by what they expect inflation to be over the next two, three, four years," said Detmeister, former head of the Fed Board’s wage and price section.

Rent prices "is an area where we have a strong view that inflation is going to fall but the exact timing is pretty difficult."

He's expecting a 29bp increase in core PCE and a 5bp rise in headline in December.


Prices for core services outside of housing rents, a component Fed Chair Jay Powell and his colleagues have highlighted, rose 25bp versus 12bp in November, but that was one of the smallest increases in the past couple of years.

Owners' equivalent rent and tenants' rent increases rebounded to 78 and 79bp increases after easing in the past couple of months. Market rent data continue to suggest a solid downtrend in rent increases over the next 12 months, he said.

Detmeister said he's expecting two more 25bp increases in the fed funds rate that would leave it in a range of 4.75% to 5%. He cited weakening growth prospects and a broad slowing in inflation, adding that much of last year's historic rate increases have yet to hit the economy.

Some former Fed officials see the Fed hewing more closely to a December SEP that showed 75bp of rate increases this year. (See: MNI: Fed Rates Likely Headed Above 5% Despite Cooling CPI)

"There's still a chance of a soft landing, but it's not the base case," said Detmeister, now at UBS.

"The expectations are that the biggest impact on the real side of the economy on GDP in the labor market move is 12 months after the change in interest rates. We're still not even a year from the first interest rate hike. You probably have not even seen half of the impact of the Fed hikes at this point."

MNI Washington Bureau | +1 202-371-2121 |
MNI Washington Bureau | +1 202-371-2121 |

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