Rising rents pose risks to Fed inflation outlook

The biggest wildcard for US inflation over the next year doesn’t come from used cars or air fares. Instead, it’s housing.

Federal Reserve and White House officials have highlighted what many forecasters expect will be the temporary nature of the high price readings resulting from the economy reopening following the pandemic restrictions. .

But the extent to which 12-month inflation figures come back to the central bank’s 2% target could depend on the behavior of rents and house prices. In recent months, housing cost trends indicate more persistent, rather than transient, upward pressure on prices in the years to come.

Core inflation, which excludes volatile food and energy costs, rose 3.5% in June from a year earlier, according to the Fed’s preferred indicator, the index of price of personal consumption expenditure. It was the highest growth rate in 30 years. The price hike in the April to June quarter largely reflects disrupted supply chains, temporary shortages and a rebound in travel, trends that preceded the latest wave of the virus caused by the Delta variant of the virus. Covid-19.

Economists at Goldman Sachs Group Inc. estimate that travel and other limited-supply categories have added 1.2 percentage points to core inflation this year, and they expect those contributions to decline to around 0.6 percentage points. percentage by the end of the year.