Progress on disinflation has stalled in early 2024, posing a challenge to the Federal Reserve’s plans to bring interest rates down from the current peak levels of 5.25% to 5.5%. Rates have remained at the same level since July 2023, with one or two interest rate cuts expected in 2024, compared to the previously projected three or four cuts. The upcoming April Consumer Price Index release on May 15 may prove crucial in determining the future course of interest rate cuts, with shelter costs playing a significant role in the decision-making process.
The Federal Reserve is closely monitoring inflation trends, with the April CPI release expected to show whether inflation is on track to reach the target rate of 2%. Nowcasts from the Cleveland Federal Reserve estimate that April CPI may once again come in at 0.4%, signaling an annualized inflation rate of 5% if current trends continue. Shelter prices, which contribute a significant portion to the CPI reading, have been on the rise, with a 5.7% annual rate increase recorded up to March 2024. However, industry sources suggest lower rates of shelter cost inflation, with potential implications for the FOMC’s decision-making process.
Regional variations in rental prices are also impacting inflation trends, with faster growth rates recorded in the Northeast and Midwest compared to the west coast and south. Rental prices in cities like New York and Chicago are rising at a faster pace, while markets in Los Angeles and Las Vegas are seeing comparatively lower growth rates. The divergence between CPI figures and industry estimates regarding rental prices has persisted for several months, adding uncertainty to the timing of any potential convergence. It is important to note that statistical effects may affect inflation readings in both directions, with industry measurements previously peaking at higher levels than CPI estimates in 2022.
As the FOMC assesses the April CPI reading, potential indications from industry rental price data may provide some optimism regarding inflation trends. However, the timing and extent of any convergence between CPI figures and industry estimates remain uncertain. Despite the challenges posed by the current inflationary trends, there are reasons to be hopeful that shelter costs could play a key role in bringing inflation back on track to reach the 2% target rate. The upcoming CPI release will be closely watched by policymakers as they navigate the complex landscape of inflation and interest rate adjustments in 2024.
