Cleveland Fed's latest warning: Inflation may still be a "big issue"!
The Cleveland Fed report pointed out that rent inflation will continue to put pressure on consumers, potentially challenging the Fed's inflation target of 2%. Rent inflation in the CPI is expected to remain above pre-pandemic levels until mid-2026. The gap between new rents and existing lease rents is a key factor, with analysts believing this will lead to potential rent inflation being transmitted to existing tenants. Federal Reserve officials generally believe that inflation is receding, but the persistence of housing inflation may complicate anti-inflation efforts
A report released by the Cleveland Fed on Wednesday stated that rental inflation will continue to put pressure on consumers in the near future, a finding that may indicate challenges for the Fed in bringing overall inflation down to 2%.
Economists at the Cleveland Fed stated in the report, "Our baseline forecast implies that rental inflation in the CPI will remain above the pre-COVID-19 level of about 3.5% until mid-2026."
One key factor in sustaining the rise in rental inflation is the gap between new rents and existing lease rents. Analysts suggest that a significant increase in new lease rents takes time to manifest in data, known as a lag effect.
The statement accompanying the report noted that this gap is "significantly larger than" before the start of the COVID-19 pandemic, when the gap was only slightly above 1%. The report stated, "We estimate that the rental gap in September 2024 is slightly below 5.5%, indicating that there is still a significant amount of potential rental inflation to be transmitted to existing tenants."
The possibility of continued rental inflation could complicate the Fed's anti-inflation efforts.
Fed officials generally believe that inflation is returning to 2%, hence they initiated a rate-cutting cycle last month, which may continue for a period as officials work towards normalizing monetary policy.
Many Fed officials and economists anticipate that housing inflation will ease, aiding the anti-inflation process.
Omair Sharif of research firm Inflation Insights stated in a report on October 10th that the annualized rental growth rate as of September this year was 4.6%, compared to 6.8% in 2023. He said, "This shows a significant slowdown in rental growth."
St. Louis Fed President Moulamein stated on October 7th, "The decline in rental inflation should gradually reduce the housing component of the overall price index over time." This led him to say that he expects inflation measured by the PCE price index to reach the 2% target in the "coming quarters."
Boston Fed President Collins stated on October 8th that the rise in housing prices "is the most stubborn factor and still higher than the average level before the COVID-19 pandemic."
However, she added, "There are good reasons to believe that the current persistence of housing inflation reflects existing rents still catching up to new market rents." She noted that the slowdown in new rental price increases indicates that the eventual slowdown in lease renewal increases.
She also mentioned that the slowdown in new rental increases reflects a job market that is no longer as hot