(Reuters) – U.S. housing inflation is likely to ease next year as the gap between housing demand and supply narrows, according to research released by the San Francisco Federal Reserve on Tuesday.
This decline is likely to further increase downward pressure on inflation, the researchers said in the district Fed’s latest economic letter.
Stubbornly high shelter inflation has significantly increased price pressures across the United States in recent years, even as the Federal Reserve has aggressively raised borrowing costs to rein in inflation.
That’s because higher borrowing costs reduce demand for housing, while higher housing costs for builders also reduce supply.
Although housing inflation has declined in recent months, it remains well above pre-pandemic levels and continues to account for a large portion of overall inflation. For example, the shelter inflation rate in July increased by 5% year-on-year, and the overall consumer price inflation rate was recorded at 2.9%.
Research shows that rent increases will eventually slow in the face of rising borrowing costs, but it will take time.
Researchers at the San Francisco Fed used pre-pandemic data to estimate future shelter inflation trends and found that by the end of the year, shelter inflation would fall to 2%, and by next year it would be at its pre-pandemic average. They found that it could return to 3.3%.
“While the extent and speed of shelter-in-place inflation adjustments are highly uncertain, this will put downward pressure on overall inflation,” the researchers said.
The Fed is widely expected to begin lowering interest rates to their current range of 5.25% to 5.50% later this month, after aggressive rate hikes in 2022 and 2023.
(Reporting by Ann Safir; Editing by Chris Rees)
