Short vs. Long-Term Inflation? Housing Poses Greatest Risk

Inflation in airline fares, car production and lumber prices should flatten soon. Inflation’s highest long-term risk comes from escalating home prices and rental rates.

NEW YORK – The Federal Reserve predicts current inflation rates will be short-lived because supply problems with used cars and lumber will correct itself. If there’s a long-term problem with inflation, however, it’s likely tied to the housing industry.

The degree to which 12-month inflation readings fall back to the central bank’s 2% goal could rest on the behavior of rents and home prices. And in recent months, housing-cost trends point to more persistent, rather than transitory, upward price pressures in the coming years.

Core inflation rose 3.5% in June from a year earlier – the highest rate of growth in 30 years. In a June report, Fannie Mae economists predicted that the rate of shelter inflation would pick up from around 2% in May to 4.5% over the coming years – and higher still if house-price growth doesn’t cool off soon. They forecast that by the end of 2022, housing could contribute 1 percentage point to core PCE inflation, the strongest contribution since 1990, and they forecast core inflation slowing to just 3% by then.

Housing inflation is important because it accounts for a hefty share of overall inflation – around 18% of core PCE inflation, and around one-third of a separate inflation gauge, the Labor Department’s consumer-price index.

Meanwhile, rent growth slowed sharply during the pandemic as people stayed put or doubled up with family. Residential rents rose 1.9% over the 12 months through June, about half of the rate of growth seen in February 2020. Home prices rose 16.6% in May from one year earlier, according to the S&P/Case-Shiller U.S. national home price index, up from around 4% in the year before the pandemic.

Higher home prices could prevent more would-be buyers from becoming owners, which may keep pressure on rents. A recent study by Fed economists found that new for-sale listings would have had to expand by 20% to keep price growth at pre-pandemic levels.

Still, a majority of economists surveyed by The Wall Street Journal in July agree that the current inflation rate will noticeably contract over the next 16 months, projecting that inflation would decline to at least 2.2% by the end of 2022.

Source: Wall Street Journal (08/08/21) Timiraos, Nick

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