INFLATION

Fed’s 2% inflation target could be delivered early

Former Federal Reserve Chair Alan Greenspan said inflation is under control when consumers don’t have to think about it before making a purchase.

 

Twenty months into the current Fed’s rate-hiking cycle, people are still thinking about it. Prices remain uncomfortably high, with the Consumer Price Index (CPI) up 3.7% in September from a year ago.

 

Many investors are worried the final stretch to the Fed’s 2% inflation target will be challenging. However, there are signs that prices may ease substantially and, according to Capital Group economist Jared Franz, “the much anticipated 2% inflation baby could be delivered early.”

 

This comes as the U.S. economy and labor markets continue to hum, defying forecasts of a recession.

‘Immaculate disinflation’? Cooling prices amid low jobless claims

Sources: Capital Group, Bureau of Labor Statistics, U.S. Department of Labor. CPI is the year-over-year change in the Consumer Price Index for All Urban Consumers. Initial jobless claims represent new claimants for unemployment benefits. As of September 30, 2023.

Sky-high rent is falling

 

“The inflation story today is very different from 2022, and there is one big reason why: Rent has decelerated,” says Franz. “Where rents go, inflation will eventually follow.” So it makes sense that economists start with rent expectations to forecast CPI. Specifically, rent increases need to slow to 4% for the Fed to have any chance of achieving their target.

 

The post-pandemic surge in rent has fallen dramatically closer to that 4% figure. A look at the rent component of CPI shows that price increases slowed to about 5.9% in September from a peak of 9.1% in June 2022. Rent data from real estate company Zillow, which measures asking rent on new leases, has rent rising at an even slower pace of 3.2%.

 

It can take several months for lower rents — as tracked by Zillow and other sites — to flow to CPI. Nevertheless, as Franz puts it, “There may be some blips, but rent is speeding in the right direction.”

Slowing rent puts the Fed’s 2% target within reach

Sources: Capital Group, U.S. Bureau of Labor Statistics, Zillow. The Zillow Observed Rent Index (ZORI) is a smoothed measure of the typical observed market rate rent across a given region (shown above for the entire U.S.) and is weighted to the rental housing stock to ensure representativeness across the entire market. The change in the ZORI is represented by the year-over-year percent change. CPI above refers to the Consumer Price Index for All Urban Consumers, and the line above represents the annualized monthly percent change in the Rent of Primary Residence component (average across all U.S. cities). As of September 30, 2023.