US Housing Inflation Likely to Fall in Year Ahead, Fed Paper Says

• U.S. housing inflation is likely to ease next year as the gap between supply and demand for homes narrows, according to research published by the Federal Reserve Bank of San Francisco on Tuesday. That decline will likely add to downward pressure on inflation.
• Stubbornly high shelter inflation has added considerably to overall U.S. price pressures in recent years even as the Fed raised borrowing costs aggressively to bring down inflation.
• While higher borrowing costs reduce demand for housing, it also reduces supply by making it more costly for builders. In recent months housing inflation has come down, but it remains well above pre-pandemic levels and continues to account for a large share of overall inflation. In July, shelter inflation rose 5% from a year earlier, while overall consumer price inflation registered 2.9%.
• Research shows that rent increases eventually do slow in the face of rising borrowing costs, but it takes some time. San Francisco Fed researchers used data from before the pandemic to estimate future shelter inflation trends and found that by year's end shelter inflation may drop to as low as 2%, before reverting next year to its 3.3% pre-pandemic average.
• "This will contribute downward pressure to inflation overall, although the extent and speed of this adjustment in shelter inflation is highly uncertain". Since housing inflation constitutes a significant part of the country’s headline inflation, a short-term easing in this sector could prompt the Federal Reserve to implement more accommodative rate cuts in the future. The U.S. Fed is widely expected to start lowering its policy rate later this month after aggressive interest-rate hikes in 2022 and 2023 to its current range of 5.25%-5.50%.

(Source: Reuters)