Chart of the Week

We recently increased our CPI inflation forecast for year-end 2024 and released our 2025 forecast.¹ Both targets are now 3%, above the Federal Reserve’s (Fed) 2% long-term goal. We still anticipate a brief window of disinflation this year should economic growth gradually slow and allow the Fed to initiate rate cuts as we expect. However, we envision a slight firming of inflation once this pivot to lower rates spurs a modest economic recovery. Sticky, less economically sensitive CPI components also play a role — one notable example is rental inflation, which accounts for nearly one third of the CPI.

The above chart shows the historically long lag between home prices and rents, comparing the year-ago percent change in U.S. home prices (moved forward 18 months) with the year-ago percent change in rental inflation. Rents have typically followed home prices with a 12- to 18-month lag, so the data suggests the latest upturn in home prices likely will presage higher rental inflation in 2025, reinforced by slower growth of apartment supply later this year.

Rental disinflation in 2023 was driven by a deceleration in home-price gains along with a temporary bulge in apartment construction, but we see these drivers as having since reversed. We think firmer rental inflation into 2025 is one of several factors that will keep inflation above the Fed’s 2% target, increasing upside risk to interest rates that could hamper growth. That reinforces our preference for more defensive portfolio positioning and makes the timing of future adjustments dependent on the interplay between economic activity, interest rates, and financial conditions.

¹ Our CPI targets are calculated as a year-over-year percent change (from December to December).

Forecasts, estimates, and projections are not guaranteed and are based on certain assumptions and views of market and economic conditions which are subject to change.

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