Inflation has been among the most closely watched economic variables over the past 2 years. Now declining home prices may enable inflation to trend closer to the Fed's inflation target.
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Many components of inflation have eased over the past year, while housing costs have continued to accelerate. However, there are good reasons to expect that to change over the coming months.Inflation has been among the most closely watched economic variables over the past 2 years and has driven an aggressive increase in interest rates from the Federal Reserve. Recently, annual inflation has fallen from an peak of 9% during summer 2022 to 5% today.
At this point, after many other products and services have stabilized, or even started to decline in price, home prices continues to surge within CPI data. When and if that changes it will have a meaningful impact on headline inflation numbers both due to the current large year-on-year price changes for housing and the very large weighting housing costs have in the CPI calculation. Today most of the increase in headline CPI is due to housing costs.
This enables more homes to be included in the dataset, but the panel-approach also adds a lag of at least six months to the shelter cost index in the CPI. Furthermore, because housing leases are not renewed every month, the lag to current prices may be greater still.
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