U.S. housing inflation is likely to ease in the coming year, driven by a narrowing gap between the supply and demand for homes, according to the research published by the Federal Reserve Bank of San Francisco on Tuesday.
Housing costs are one of the largest expenses borne by a household and therefore receive a significant weight in the construction of the consumer price index (CPI). For instance, July 2024 data showed that housing services contributed 2.2 percentage points to a core CPI reading of 3.2% on a 12-month basis, excluding volatile energy and food prices.
According to the Economic Letter of the regional Fed bank, it is very likely that the decline will be adding a downward pressure on inflation.
The result of the research is welcoming considering that for quite some time, the U.S. has been experiencing high housing inflation. The effect was not only limited to housing, but also added pressure to the overall prices in the U.S. This was despite the Fed's effort of raising borrowing costs to help bring down inflation, Reuters reported.
Although the high borrowing cost resulted in a lower demand for housing, it made construction costly for builders thus reducing the supply.
A look at the housing inflation in recent months would show that the rate has actually come down. However, it is still higher compared to pre-pandemic levels. In addition, housing inflation still makes up for a large share of the inflation on the overall.
Data on housing in July compared to the same month last year would show an increase in housing inflation by 5%. On the other hand, overall consumer price inflation was at 2.9%.
Research shows that with rising borrowing costs, the rate also tends to slow down, but it must be noted that the process takes a bit of time.
The Fed research paper utilized pre-pandemic data in order to give an estimate of future trends in housing inflation. According to the paper, by year end, it is possible for housing inflation to drop to up to 2%.
"Using a model that takes advantage of measures of the balance in the supply and demand of housing, we project that shelter inflation will continue to decline over the next few months. This will contribute downward pressure to inflation overall, although the extent and speed of this adjustment in shelter inflation is highly uncertain," the paper stated.
