US Housing Inflation Expected to Decrease in the Coming Year, According to Fed Paper by Reuters

U.S. housing inflation is expected to moderate in the upcoming year as the disparity between housing supply and demand shrinks, according to research released by the Federal Reserve Bank of San Francisco.

This anticipated decline in housing inflation could contribute to an overall decrease in inflation, as noted in the latest Economic Letter from the regional Federal Reserve bank.

Persistent shelter inflation has significantly contributed to overall price increases in the U.S. in recent years, even as the Federal Reserve raised interest rates to combat inflation. Higher borrowing costs dampen housing demand, but they also hinder supply by making construction more expensive for builders.

While housing inflation has decreased in recent months, it remains significantly above pre-pandemic levels and continues to be a major factor in overall inflation. For example, in July, shelter inflation climbed by 5% compared to a year earlier, while overall consumer price inflation was recorded at 2.9%.

Research indicates that rent increases typically slow down in response to higher borrowing costs, though this adjustment takes time. The San Francisco Fed’s researchers analyzed data from prior to the pandemic to forecast future trends in shelter inflation, estimating that by the end of the year, it could decline to as low as 2%, before reverting to the pre-pandemic average of 3.3% next year.

“This will contribute downward pressure to inflation overall, although the extent and speed of this adjustment in shelter inflation is highly uncertain,” the researchers remarked.

The Federal Reserve is widely anticipated to begin lowering its policy rate later this month, following a series of aggressive interest rate hikes in 2022 and 2023, which have brought the current rate to a range of 5.25% to 5.50%.