SF Fed Economists See Potential For Significant Shelter Disinflation

In a note published today, SF Fed economists' modelled estimates of Y/Y shelter inflation for late 2024 - based on leading indicators from 2018-2023 - come in at "about –9% to about 2% in our baseline model [chart below], and –2% to 5% in our limited model" [when excluding the index that has the most negative impact on the cumulative forecast, lagged CPI shelter inflation].

• Their baseline forecast suggests Y/Y shelter inflation may turn negative by mid-2024, which would be the most severe contraction since the GFC.
• This is not an altogether groundbreaking finding (shelter inflation has already been slowing), but supports the FOMC's consensus outlook for shelter disinflation to help overall price pressures to subside over the coming year, with Powell and other senior leaders instead highlighting core services prices ex-shelter as the main guidepost for overall inflation progress.
• As for policy implications, the authors note, "Monetary policy famously operates with 'long and variable lags,' and our forecasts imply that this guidance is relevant when looking at housing markets and shelter inflation. In particular, our forecasts suggest that the rapid rise in interest rates since early 2022 is likely to have had a significant effect on slowing housing markets, and this slowdown is likely to continue going forward."

Source: SF Fed