In 2022, the United States experienced a concerning peak in inflation, soaring above 7%. The causes were multifaceted, pervading both goods and services sectors. Fast forward to the present, and inflation has retreated to below 3%. However, the landscape has shifted dramatically. Now, the primary culprit driving inflationary pressures is housing.
The Federal Reserve's hesitance to implement anticipated rate cuts, despite Wall Street's clamoring, can be attributed in part to unexpectedly robust readings in the rental category during the initial months of the year. Austan Goolsbee, President of the Chicago Fed, expressed surprise at the sluggish pace at which housing inflation has receded. "We thought we basically understood the mechanical, short-run model of how much housing inflation should be coming down," he remarked. "And it hasn’t come down as fast as we thought it was going to have come down at this point."
However, the issue of rental inflation is no longer uniformly distributed across the country. Geographical disparities have become pronounced. The Northeast and Midwest regions continue to grapple with stubbornly high inflation, whereas the West and South witness a rapid moderation in inflationary pressures. The differentiating factor? Supply.
Chris Salviati, a housing economist at Apartment List, elucidates the correlation between rental market dynamics and construction activity. "There’s really strong overlap right now between the markets that are seeing the biggest rent declines and the ones where there’s been the most construction."
This narrative highlights a nuanced evolution in the inflationary landscape. From a broad-based inflationary surge encompassing various sectors to a more focused challenge centered on housing, the dynamics of inflation in the US are undergoing a transformation shaped by supply dynamics. Understanding these intricacies is crucial for policymakers and market participants alike as they navigate the path forward amidst shifting economic currents.