The Federal Reserve (Fed) is finalizing its next rate decision, which will be confirmed on Wednesday, with one more hike since the return to monetary tightening in the United States that began half a year ago. Looking ahead to the appointment, the body will have in its sights the main cause of inflation: housing (and not energy).
Although in recent months the focus has been on and of , rents have a great weight in the level of prices and in household spending. In fact, this reference is less volatile and allows evaluating what contributes to the Consumer Price Index (CPI) by focusing on a more persistent component. According to Idealista, rents account for almost a third of the CPI and around 40% of underlying inflation. The real estate portal highlights its importance in calculating the evolution of prices and its ability to reflect inflationary pressures.
From the French manager La Financière de L’Echiquier (LFDE) they also point to housing as the main responsible for the rise in prices and, again, they leave energy in the background. “The problem is not so much the general level of inflation, but above all its main cause, deeper than the increase in energy and food prices: housing,” says Olivier de Berranger, director of investment and management of firm assets.
The manager explains that , August, reflects that the problem is not in the final figure. Last month, inflation stood at 8.3% year-on-year, moderating since July, but standing two tenths above expectations. After knowing the data, they were unleashed in the markets, since what mattered was the background. In other words, what is the main reason why prices continue to rise above expectations, how long can inflationary pressure last and, therefore, what will be the pace of monetary tightening.
“Something that might have seemed insignificant – given that the difference between expectations and reality was small – triggered an earthquake in the markets,” says de Berranger. The reading that investors did then was that rents will continue to rise, at the same time that loans become more expensive, which, in turn, will trigger new salary increases. For this reason, the manager’s investment director expects lasting inflation and “bellicose central banks, even if growth suffers.”
Incomes are relevant to decide on adjustments and stimulus cuts and are essential in the underlying, since here the most volatile prices of food and prices are extracted. According to Idealista, rent inflation has advanced almost 6% year-on-year until July and is expected to rise above 7% at the beginning of next year, 2023.
In addition, the increase in rental prices is not immediately reflected in the CPI since changes in housing are not immediate and tenants do not move every year. “Experts rule out short-term price drops, and that it will take time to return to the data that was in the pre-pandemic period,” indicates Idealista.
High inflation for a long time
The French manager LFDE also agrees that the rise in prices. Her analysis is based on the crisis of the 1970s, which is reminiscent of the current situation despite the differences between the two. So, a first inflation peak was reached in 1974, at 12% in the United States. Two years later, the IPC moderated, but climbed again in 1980, up to 15%. Something indicates that “inflation can stay high for a long time.”
Idealista advances that rental inflation will reach its maximum at the beginning of 2023 and that it will also remain high at the end of 2024. Specifically, around 4% compared to the levels prior to the outbreak of the conoravirus. And, until the situation is normalized, it will take a few years. In this context, since the rate hikes are 50 basis points, hikes of 75 or 100 basis points will be required to counteract inflation.
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