Thu. Sep 21st, 2023
    Awareness of Slowdown in Rent Growth to be Captured Gradually by Fed’s Inflation Measure, Says Powell

    Federal Reserve Chair Jerome Powell has stated that while the central bank is aware that rent growth is slowing throughout the country, it will take time before that slowdown is reflected in the Fed’s inflation gauge. Powell made these remarks during a speech to kick off the Fed’s annual retreat in Jackson Hole, Wyoming. He highlighted the fact that rent growth, a significant contributor to overall inflation, has been experiencing a slowdown, but the Fed’s measurement of price changes has only recently started to show this cooling off.

    Powell explained that the slowdown in rents is a result of higher interest rates and a softening in real household income growth over the past few years. This is in addition to the effects of monetary policy becoming apparent in the housing sector.

    In July, the rate of inflation increased to 3.2% from the previous month, with over 90% of the rise in prices attributed to increasing housing costs. The Fed’s target is to achieve an annual inflation rate of 2%, and Powell indicated that the central bank is prepared to raise interest rates further to reach that goal. However, Powell also acknowledged that the way the Fed measures housing inflation has been slower than private data sources.

    Apartment List reported that rents fell 0.7% in July compared to the previous year, marking the first decline in rent growth since the early stages of the pandemic. The trend of slowing rent growth is expected to continue as more apartments and single-family homes become available, along with seasonal factors.

    The Fed’s measurement of housing inflation includes rents paid by all tenants, as well as the equivalent rents that could be earned from owner-occupied homes. Powell noted that even the Fed’s indicators have started to show a slowdown in rent growth, suggesting that this will eventually be reflected in the overall inflation measure. He emphasized the importance of closely monitoring the market rent data to assess the risks and potential effects on housing-services inflation.

    In conclusion, the Fed is aware of the slowdown in rent growth; however, it is waiting to observe this trend in the data. Powell highlighted that if market rent growth settles close to pre-pandemic levels, housing-services inflation will also decrease accordingly. The Fed will continue to monitor the market rent data to assess the risks associated with housing-services inflation.

    Source: MarketWatch (Dow Jones & Co).