The Final Hurdle

How high housing costs feed inflation

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High Inflation? Blame Housing.

One indicator the Federal Reserve watches closely when planning—or delaying—interest rate cuts is housing costs. And the more stable rental rates become compared to home prices, the more upward pressure builds behind the inflation indicators the Fed relies on.?

Here’s how home prices complicate the Fed’s interest rate plans:

• The Fed uses a calculation called “homeowners’ equivalent rent” to determine how much owning a home affects inflation. They do this by comparing what individuals pay for ownership to what they would pay if they rented the same place.
• While the U.S. focuses on rental equivalent costs, other countries might include actual homeowner expenses like mortgage interest and maintenance costs in their calculations. This difference can make it tricky for the Fed to compare and manage inflation effectively.
• There's often a lag between real-time market changes in housing prices and how these changes show up in inflation data. This delay can slow down the Fed's ability to adjust interest rates quickly in response to current economic conditions. This means that even if housing prices start to stabilize, the inflation data the Fed uses might not reflect this change immediately.

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