Progress on disinflation has stalled in early 2024 after steady improvements since mid-2022. The Federal Open Market Committee (FOMC) plans to bring interest rates down from 5.25% to 5.5%, but currently, only one or two interest rate cuts are expected this year compared to previous projections of three or four cuts. The April Consumer Price Index (CPI) release on May 15 will be crucial in determining whether inflation is trending back to a 2% annual rate, which could impact the timing of interest rate cuts.
Shelter costs play a significant role in the CPI, contributing 36% to the reading and increasing at a 5.7% annual rate to March 2024. More than half of the current 3.5% CPI inflation is due to rising shelter costs. The statistical complexity of the CPI shelter cost data and regional variations in rental prices could impact the overall CPI reading. While industry sources suggest lower rates of shelter cost inflation compared to CPI estimates, the timing of any convergence between the two remains uncertain.
Regional variations in rental prices show that rental prices in the Northeast and Midwest are rising faster than average, while prices on the west coast and south are cooling. Rental prices in certain Texas markets are even experiencing declines. If shelter costs converge to industry estimates, it may give the FOMC confidence that 2% annual inflation is achievable. However, the disconnect between CPI figures and industry estimates has persisted for months, making it unclear when or if these trends will align.
Current assessments suggest that the April CPI reading may not provide comfort to FOMC policymakers that inflation is on track to reach 2%. Despite potential reasons for optimism based on industry rental price data, the timing of any convergence between CPI figures and industry estimates remains uncertain. If inflation readings do ease, shelter costs are likely to be a key contributor, but the extent to which this will impact the overall CPI remains to be seen.
Ultimately, the FOMC’s decision on interest rate cuts in 2024 will depend on the trajectory of inflation, particularly regarding shelter costs. The upcoming April CPI release will be critical in determining whether inflation is trending towards the FOMC’s target of 2% annual inflation. Observing regional variations in rental prices and monitoring industry estimates of rental price inflation will also play a role in shaping the FOMC’s decisions moving forward.
