Could Shelter Inflation bottom in October-November this year? Just at the moment of US election…
Today's YoY inflation is 3.50%, of which the Shelter contribution is as much as 1.971 percentage points (in other words, as much as 56% of the annual change in inflation is just Shelter). If Shelter falls from today's 5.7% to 2.5% in October this year – headline inflation would be below 2.5%, ceteris paribus.
Shelter is 36.184% of the entire basket and consists of the following components:
(i) Rent of Primary Residence (7.639% of the basket) and
(ii) Owner's Equivalent Rent of Residence (26.713% of the basket),
(iii) Logging away from Home (1.422% of the basket),
(iv) Tenants' and Household Insurance (0.410% of the basket).
Rent of Primary Residence is the rental charge which consumers pay to rent their primary residence. OER is the rental equivalent homeowners expect to be paid if they were renting out their own home in the market.
These two series measure the market change in rents, but for all housing units. All units is key here. But the changes in new rents are strongly leading. E.g. Apartment List National Rent Index captures price changes in new leases, which are only later reflected in price changes across all leases.
Figure 1 shows the change in rents since December 2019, while Figure 2 also shows the change in national home prices. Evidently, both new rent prices and home prices are significantly ahead of changes in rents in CPI inflation.
Figure 3 shows the YoY changes. However, in Figure 4, the Apartment List Index and the National Home Price Index have been moved forward by 15 months.
Figure 5 is key here. Changes to the Apartment List Index and the National Home Price Index are now on a separate axis... And they suggest a decline in Shelter inflation to levels of approximately 2.5% YoY in October 2024.
In other words, one can expect headline inflation to decline by as much as about 1 percentage point by October this year - solely due to the drop in Shelter Inflation!
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