Shelter inflation is the key to North American inflation outlook

Read full post at forexlive.com

It’s
all
housing
at
this
point.

CIBC
today
highlights
that
shelter
is
the
key
to
getting
inflation
back
to
the
Fed
and
Bank
of
Canada
targets.
For
the
Fed,
they
note
that
core
inflation
excluding
housing
is
already
at
2%
y/y.

They
highlight
analysis
suggesting
that
rent
inflation
takes
about
a
year
to
enter
the
official
measures,
so
at
this
point
the
Fed
is
fighting
ghosts.

“Happily,
research
out
of
the
Richmond1
and
Boston
Fed,
using
two
very
different
methodologies,
arrive
at
broadly
similar
conclusions:
by
the
middle
of
next
year,
shelter
inflation
should
come
down
to
close
to
its
pre-pandemic
average
of
3%.
The
Richmond
Fed
estimate
is
more
aggressive,
suggesting
shelter
should
fall
by
3%-points
to
around
2%
while
the
Boston
Fed
paper
has
a
more
steady
pace
of
disinflation
resulting
in
a
2%-point
decline.
But
both
suggest
major
progress
is
right
around
the
corner.

CIBC
sees
shelter
inflation
falling
to
3%
by
mid-2025,
which
would
bring
it
back
to
pre-pandemic
levels.

In
Canada,
the
calculation
is
different
but
the
result
is
the
same.
The
major
cost
weighing
on
Canadians
is
mortgage
interest,
due
to
variable
rate
mortgages
and
5-year
resets.
However
with
BOC
rates
staying
flat,
those
on
variable
rates
will
soon
see
flat
y/y
price
changes.

For
these
changes,
CIBC
built
its
own
model
and
see
mortgage
interest
costs
‘cooling
dramatically’
over
the
coming
year-and-a-half,
leading
the
BOC
to
cut
the
overnight
rate
to
2.75%
by
the
end
of
2025.

There’s
more
to
the
inflation
story
than
shelter
in
both
the
US
and
Canada.
But
gaining
some
shelter
from
rising
costs
for
accommodation
is
no
small
part
of
the
last
mile.
It’s
also
an
important
part
of
keeping
inflation
expectations
anchored
and
therefore
material
to
supporting
interest
rate
reductions
in
both
countries
through
2025

I
think
the
market
has
largely
moved
beyond
inflation
but
these
are
the
same
numbers
the
Fed
and
BOC
are
looking
at.
Next
up
is
the
BOC
on
July
24
and
the
implied
probability
of
a
cut
is
66%.