Global Fixed Income Strategy - June 2024
US disinflation continues
We believe the US continues to be on a disinflationary path. Progress on disinflation stalled at the start of the year, delaying the Fed’s expected rate cutting cycle. But recent data have been more encouraging. Going forward, we believe three main factors will push inflation lower and toward price stability: declines in shelter inflation, declines in goods inflation and declines in non-shelter core services inflation.
1. Lower shelter inflation should drive disinflation. We expect shelter inflation to be a major source of disinflation in the coming months. This is because rent increases in new leases measured by private data sources show that rent inflation has returned to pre-pandemic norms. Nevertheless, official rent inflation measures in the Consumer Price Index (CPI) remain elevated due to inherent lags caused by methodology.
There are two major components of shelter inflation in the CPI: Owners’ Equivalent Rent (OER) and rent of primary residence (rent). OER estimates the cost of living in an owner-occupied house as if it were a rental property, representing the rent that homeowners would theoretically pay if they rented their homes instead of owning them. The other important shelter component is the rent of primary residence. Both series are derived from the same data that sample rents and often closely mimic each other. However, they can occasionally diverge due to factors such as the cost of utilities considered by the Bureau of Labor Statistics (BLS). The main point is that the primary source data for both measures of shelter inflation are rent data.
It is widely known that official measures of shelter inflation lag behind current market rents with a substantial delay. This lag is by design, as official measures aim to represent the cost of living for all households, while new leases constitute a small share of households and are renewed gradually. It takes time for most contracts to be renewed and reflect underlying market trends, and in official measures, this lag can be more than a year.
