According to research published by the Federal Reserve Bank of San Francisco, U.S. housing inflation is likely to ease in the coming year as the gap between supply and demand for homes narrows. This decline is expected to add to downward pressure on inflation, impacting overall price pressures in the U.S. economy.
Stubbornly high shelter inflation has contributed significantly to overall U.S. price pressures in recent years, even as the Fed raised borrowing costs to combat inflation. The higher borrowing costs reduced demand for housing but also made it more costly for builders, affecting the supply side as well.
Recent data shows that housing inflation has started to come down, but it remains elevated compared to pre-pandemic levels. In July, shelter inflation rose by 5% from a year earlier, while overall consumer price inflation was at 2.9%. Rent increases are expected to slow down over time in response to rising borrowing costs.
The San Francisco Fed researchers used pre-pandemic data to predict future shelter inflation trends, forecasting a drop to as low as 2% by the end of the year before reverting to its pre-pandemic average of 3.3% next year. However, the extent and speed of this adjustment in shelter inflation remain uncertain.
As a result of these trends, investors and financial markets may see changes in the coming months. The Federal Reserve is expected to start lowering its policy rate after previous interest rate hikes, which could impact investment strategies and market dynamics.
In conclusion, the expected easing of U.S. housing inflation and its impact on overall inflation rates could have implications for investors and financial markets. Understanding these trends and their potential effects on investments is crucial for making informed decisions in the current economic environment.