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Extract from our "Shelter Inflation Elevated Due in Part to the Fed" research paper, published on the 13th July 2023. Register for a free trial* to access the full paper.

US headline inflation has fallen as sharply as it had risen, but core inflation has been stubbornly sticky on the downside for the past six months, with the ‘stickiest’ component being rent and housing-related costs. These housing-related costs are the biggest component (34 percent) of the CPI index. We believe interest rate hikes themselves may have perversely contributed to the rise in shelter inflation: sharp and large Fed rate hikes have led to a sharp and large rise in the mortgage rates, which have, in turn, abruptly discouraged property purchases and forced households into the rental market. Rather perversely, the more the Fed tightens, thus, the higher the rents and rental inflation, especially in the early stages of a tightening cycle. Rents and rental inflation should eventually fall, as high interest rates crimp households’ purchasing power. Studies show that this process is slow and may take two years before higher interest rates could lead to a fall in rental inflation. Again, rather perversely, early Fed rate cuts could run the process in reverse and help depress rent and, in turn, inflation. The general trend in US inflation, nevertheless, is definitely down, in our view: all non-shelter components of inflation are either falling fast or are already outright negative. If anything, there are non-negligible risks of temporary outright deflation in 2024.


The full report contains the following sections:

  • Divergences in the components of inflation
  • Shelter inflation: the biggest sub-component of inflation
  • Shelter inflation: why is it so elevated?
  • But in the short run, rent inflation could perversely rise as the Fed raises rates
  • Price-rent ratio and the PE ratio
  • Controversy about OER
  • Very high share of fixed rates mortgages in the US
  • Asymmetry in the Fed’s policies
  • Inflation and the Fed
  • Bottom line

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