US housing inflation could ease next year, Fed By Reuters newspaper says

(Reuters) – U.S. housing inflation is likely to moderate next year as the gap between supply and demand for housing narrows, according to research from the Federal Reserve Bank of San Francisco on Tuesday.

That decline will likely add to downward pressure on inflation, researchers said in the regional Fed’s latest economic letter.

Stubbornly high shelter inflation has added considerably to overall U.S. price pressures in recent years, even as the Fed has aggressively raised borrowing costs to curb inflation.

That’s because while higher borrowing costs reduce housing demand, they also reduce supply, making it more expensive for builders.

Housing inflation has eased in recent months, but remains well above pre-pandemic levels and continues to account for a large share of headline inflation. In July, for example, shelter inflation rose 5% from a year earlier, while overall consumer price inflation was 2.9%.

Rent increases are eventually slowing in the face of rising borrowing costs, research shows, but it will take some time.

San Francisco Fed researchers used pre-pandemic data to estimate future trends in shelter inflation and found that by the end of the year shelter inflation may fall to as low as 2 percent, before returning next year to its pre-pandemic average of 3.3 percent .

“This will contribute to downward pressure on inflation overall, although the extent and speed of this adjustment to shelter inflation is highly uncertain,” they wrote.

The Fed is expected to begin cutting its policy rate later this month after aggressive rate hikes in 2022 and 2023 to the current range of 5.25%-5.50%.