It’s Getting a Little Cooler
Rents won’t come down for a while yet.
Almost every bit of recent incoming data suggests that inflation continues to cool in the US.That includes the Federal Reserve’s preferred measure, the Personal Consumption Expenditures Price Index, more specifically the core PCE.
Core PCE strips out food and energy prices.
According to a new research paper from the Federal Reserve Bank of Boston, market rents have moderated in recent months but a pandemic-related surge in 2021 and 2022 still hasn’t worked its way through the economy
“As a result,” Christopher D. Cotton writes, “rents are on track to exert upward pressure on overall inflation for quite a while to come.”
Private-sector indicators of market rents rose much faster than the rent calculation for the Consumer Price Index as Americans used relief funds, existing savings, and rising wages to upgrade their housing.
Market rent data is calculated based on people signing new leases. That doesn’t capture the effects of long-term leases or the reluctance of tenants to raise rent on existing tenants or local laws designed to limit increases.
There is a turnover process, though, and we’re still working through it.
According to data crunched by Cotton, the process will add 0.7 percentage point to the core CPI over the next year and 0.3 percentage points to core PCE.
So people are starting to watch the labor market a little more closely for signs the Fed will move more than once and earlier than currently expected from its current interest rate policy.
Here’s how Nick Timiraos of The Wall Street Journal framed the new emerging picture in the aftermath of the most recent Federal Open Market Committee decision in mid-June:
To be sure, the trust-but-verify approach risks putting the Fed in a catch-22. Powell and his colleagues are waiting until they have more convincing evidence that the Fed’s interest-rate setting is as restrictive as they think it is. But that raises the risk it will be too late to avoid a more serious employment downturn by the time they see that evidence, a point Powell acknowledged on Wednesday.
“We completely understand that that’s the risk—and that’s not our plan, to wait for things to break and then try to fix them,” Powell said.
Fed Governor Christopher Waller, Chicago Fed President Austan Goolsbee, and San Francisco Fed President Mary Daly are speaking today.
And we’ll get consumer confidence and new home sales data, a final first quarter GDP estimate, initial jobless claims and pending home sales data, plus speeches from Governor Michelle Bowman and Governor Lisa Cook, from Tuesday through Thursday.
And we’ll get earnings reports from Nike $NKE and FedEx $FDX.
But the big thing for investors, traders, and speculators is Friday’s PCE report at 8:30 a.m. ET.
The consensus forecast is that the headline figure was flat month over month in May and up 2.6 percent year over year.
The core figure, they say, was up 0.1 percent month over month and 2.6 percent year over year.
It’s maybe not “cool,” but it is cooler.
