US Federal Reserve releases alarming data that suggests inflation will rise over next year By Investing.com

Table of Contents

• 1 Housing inflation
• 2 The labor market adds pressure to inflationary pressures
• 3 – In light of ‌the current housing ​market trends,⁢ what strategies could policymakers consider‌ to​ effectively address inflation without stifling economic‍ growth?

Investing.com – Monetary policymakers are keeping a close eye on housing inflation, which is “still not back to normal,” Chairman Jerome Powell said last week, as it could take more than a year to do so according to new data from the US Federal Reserve.

On the other hand, the US labor market continues to add inflationary pressures, although to a lesser extent than in 2022 and 2023, according to a study also published by the US Federal Reserve.

Housing inflation

According to a study by the Federal Reserve Bank of Cleveland, it may take until mid-2026 for CPI rental inflation to fall back to normal pre-pandemic levels. Although there are many signs that new rentals in particular are starting to decline, fewer people are moving and signing new leases, leaving the sample used to measure the CPI reflects these trends as a whole, the researchers said.

Housing is the largest sector in the CPI, and contributed more than half of the monthly increase in October. If this indicator remains high for a year and a half, as the Federal Reserve Bank of Cleveland expects, this will be a challenge for policymakers who rely on progress in reducing inflation as the main argument for lowering prices. .

“Inflation is evident, even if it is driven by weak data such as rents, making it difficult to lower interest rates,” said Omair Sharif, president of Inflation Insights LLC. He added: “We have already seen one Fed member’s opposition to an interest rate cut, and I believe that due to the increase in consumer price index inflation, opposition may increase.”

Sharif was referring to Michelle Bowman, who voted against a half-point rate cut in September in favor of a smaller cut, marking a rare dissent from a Fed member. Although policymakers unanimously decided to cut rates by a quarter of a point this month, the outlook for December and beyond remains unclear.

Powell spoke last week at an event in Dallas, noting that the strength of the US economy allows officials to “carefully” reduce borrowing costs. He said it would be wise to proceed slowly with interest rate cuts if economic data allows.

The Fed will target inflation based on a separate index, the Personal Product Expenditure (PCE) Index, which does not place the same weight on housing, bringing it closer to the Fed’s 2% target. But the PCE index relies on the CPI to calculate its housing measures, so a delay could affect both indices.

“If it goes higher and gets above 3%, that will make things very complicated,” said Michael Feroli, chief US economist at JPMorgan Chase & Co.

Feroli was referring to the main index of personal consumption expenditures, which excludes food and energy, which rose 2.7% in the year through September. Economists expect it to rise to 2.8% when October data is released later this month.

The CPI is designed to measure inflation for the average consumer, taking into account rent increases for all renters, whether they are renewing current leases or signing new ones. Although current metrics for companies such as Zillow Group Inc. And the Apartment List shows that although rental growth has slowed or even slowed in recent months, the CPI is following these trends with a delay.

The labor market adds pressure to inflationary pressures

On the other hand, the US labor market continues to add inflationary pressures, although to a lesser extent than in 2022 and 2023, according to a study published on Monday by the San Francisco Federal Reserve.

“A decline in excess labor demand has reduced inflation by about three-quarters of a percentage point over the past two years,” wrote San Francisco Fed economists Regis Barneshon and Adam Hale Shapiro in the latest economic statement at the Fed. “However, high demand continued to add 0.3 to 0.4 percentage points to inflation until September 2024,” they said.

This conclusion, based on an analysis of the relationship between inflation and the strength of the labor market as measured by the ratio of vacancies to job seekers, could policymakers To help the Fed assess how much short-term borrowing costs will be reduced and how quickly.

The Federal Reserve began reducing its monetary policy rate in September in response to lower inflation and a calm labor market. After a second cut earlier this month, the rate is now between 4.50% and 4.75%. US central bankers believe this rate is high enough to constrain the economy, but there is widespread internal disagreement over the extent of the impact of this restraint, and therefore over the timing and size of further cuts .

Federal Reserve Chairman Jerome Powell, who is closely monitoring the sharp decline in the ratio of job vacancies to job seekers, has said he believes job demand is close to balance with supply, and that the labor market is no longer a major source of inflation. weights.

The San Francisco Fed survey indicates that the labor market remains a factor in inflation, which Powell estimates at 2.3% in October according to the Fed’s target measure, and at 2.8% according to a closing measure. out of food and energy, and used to measure core inflation. weights. The Federal Reserve aims to achieve 2% inflation.