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A Faster Convergence of Shelter Prices and Market Rent: Implications for Inflation

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  • Christopher D. Cotton

Abstract

The Federal Reserve currently faces a “last-mile” problem in bringing inflation back to its 2 percent target. Following the series of federal funds rate hikes that began in March 2022 and ended in July 2023, core (excluding food and energy) Personal Consumption Expenditure (PCE) inflation dropped from a year-over-year peak of 5.6 percent in February 2022 to 2.9 percent in December 2023. At the end of 2023, hopes were high that falling inflation would allow the Fed to cut interest rates several times in 2024. However, the disinflation process slowed noticeably in early 2024, prompting questions about how soon the Fed can attain its 2 percent inflation target. The price of shelter accounts for a substantial share of the indexes used to measure overall inflation—the PCE and the Consumer Price Index (CPI)—and it has remained significantly above its pre-pandemic trend in recent months. Therefore, it is important to understand how shelter prices will likely evolve during the current disinflation process.

Suggested Citation

  • Christopher D. Cotton, 2024. "A Faster Convergence of Shelter Prices and Market Rent: Implications for Inflation," Current Policy Perspectives 2024-4, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbcq:98435
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    References listed on IDEAS

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    1. Brian Adams & Lara Loewenstein & Hugh Montag & Randal Verbrugge, 2024. "Disentangling Rent Index Differences: Data, Methods, and Scope," American Economic Review: Insights, American Economic Association, vol. 6(2), pages 230-245, June.
    2. John C. Driscoll & Aart C. Kraay, 1998. "Consistent Covariance Matrix Estimation With Spatially Dependent Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 549-560, November.
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    More about this item

    Keywords

    CPI; PCE; housing; disinflation; COVID-19;
    All these keywords.

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications

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