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Recently, Federal Reserve Chair Powell mentioned in a speech that real estate inflation has not yet fully normalized, and this may take up to a year or longer to see significant improvements.

So, what is the impact of rent inflation? According to research from the Cleveland Federal Reserve, rent inflation in the Consumer Price Index (CPI) may not return to pre-pandemic levels until mid-2026. Although some data shows a decrease in rental prices for new leases, the decreased population mobility means that the CPI sample does not fully reflect the actual situation, making rent inflation appear more "sticky".

How does the inflation of rent affect interest rate policies?

Rent inflation accounts for a huge proportion in the CPI. In the monthly increase in October, over half came from housing-related data. This directly pressures the Fed in formulating rate cut plans. If rent inflation remains high in the next year and a half, policymakers relying on inflation easing as a basis for rate cuts will face challenges.

President Omair Sharif of Inflation Insights LLC stated that even as a lagging indicator like rent, it will make Fed's communication more difficult and even make rate cut measures more controversial. There are already different voices within the Fed, for example, Fed Governor Michelle Bowman opposed a proposal for a 50 basis point rate cut in September and supported a smaller adjustment. Such divisions are actually very rare during Powell's tenure.

Will core inflation rebound?

Michael Feroli, Chief U.S. Economist at JP Morgan Chase, pointed out that the core PCE index (excluding food and energy) may become a key indicator in the future. If the upward trend of core PCE surpasses 3%, the Fed's rate cut plan will face greater resistance. The core PCE data for October is expected to rise from 2.7% in September to 2.8%.

It is worth noting that the PCE index differs from the CPI, with a lower weighting in the housing sector, making it closer to the Fed's 2% target. However, PCE's calculation is still based on CPI's housing data, so the lagging effect of rent cannot be ignored.