Wall Street Analysts Expect Shelter Price Drops To Lower Inflation, Forcing The Fed To Stop Hiking After May

A chorus of top Wall Street analysts expect more slowdowns in inflation in the coming months following the release of the CPI data in March, owing to substantial falls in the shelter component that accounts for roughly one-third of the basket. 

Mark Zandi, chief economist at Moody's Analytics, told CNBC this week that he was quite certain inflation would drop in the next months due to a slowdown in the cost of housing services.

"Rents have gone from flat to down here in the last three, six and nine months. This will result in lowered housing costs here till the end of the year," he stated.

Michael Gapen, economist at Bank of America Securities, expected the shelter inflation to cool more quickly in the second half of the year.

"Rent and owners' equivalent rent (OER) inflation both cooled to 0.5% m/m," BofA noted.

The economist suspected this was the start of the long-awaited moderation in rent and OER given the disinflation seen in asking rents, which lead CPI rent. 

Read Also: 'Unlikely To Change Fed's Calculus': 3 Analysts On Implications Of Lower-Than-Expected PPI In March

Jan Hatsius, economist at Goldman Sachs, welcomed the lessening of pricing pressures in the shelter component.

Goldman estimated the shelter trend to be lower moving ahead as the mark-to-market effect of current tenant rents resetting higher post-COVID-19 pandemic was already in its advanced phases.

Goldman Sachs changed its Fed call removing the hike it had previously expected in June.

Gregory Daco, chief economist at EY, also affirmed disinflationary forces were on the way as housing cost pressures eased significantly on the back of a sharp pullback in housing demand. 

Warren Pies, founder of 3 Fourteen Research, continued to expect strong shelter inflation going forward. The economist also highlighted that was the first month ever where oil prices were down more than 15% and CPI was still at or above 5%.

Market Reaction: Following this week's set of economic data, which included weaker-than-expected consumer and producer inflation, rising jobless claims and improving consumer confidence, markets have cemented expectations for a Fed interest rate hike in May, now assigning an 80% probability, according to the latest CME Group Fed Watch Tool.

The SPDR S&P 500 ETF Trust SPY is on track to complete its fifth straight week of gains, a winning streak not seen since end-October 2021. SPY is down 0.2% in Friday morning trading.  

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