Shelter Inflation Makes Bigger Rate Cut Less Likely

Rate cut expectations have reversed, with some economists now predicting the Fed could pause after its March meeting.

Shelter inflation is a major component of the Consumer Price Index (CPI), which is the most widely used measure of inflation in the United States. Shelter costs account for about one-third of the CPI, and they have been rising rapidly in recent months. The CPI rose 0.5% in January, and shelter costs accounted for more than half of that increase. The core CPI, which excludes food and energy prices, rose 0.4% in January, and shelter costs accounted for about two-thirds of that increase.

The Fed is closely watching shelter inflation because it is a sticky component of inflation.

This means that it is slow to respond to changes in monetary policy. As a result, the Fed is likely to be hesitant to cut interest rates too aggressively if shelter inflation remains high. The Fed has already raised interest rates eight times since March 2022, and it is expected to raise rates again at its next meeting in March. However, some economists are now predicting that the Fed could pause after its March meeting if shelter inflation remains high. This would be a significant change from the Fed's previous stance, which was to continue raising rates until inflation falls back to its 2% target.

The Fed's decision on whether or not to pause rate hikes will depend on the data.

If shelter inflation continues to rise, the Fed is likely to be hesitant to cut rates. However, if shelter inflation starts to moderate, the Fed could be more open to pausing rate hikes. The Fed is also likely to consider other factors, such as the labor market and economic growth, when making its decision. Ultimately, the Fed's decision will be based on its assessment of the overall economic outlook.