Insight Investment

Executive summary

The housing market indicates stable but above-target CPI for at least two years

With US inflation at the highest levels since the 1980s, investors are worried about how long inflation will remain elevated. We attempted to answer this question – not by looking at supply chains, energy prices or goods and services – but by focusing on what has historically been the most persistent and long-term driver of CPI: rental inflation. 

Our results show that inflation will remain stable but well above target for the next two years. Our central case indicates CPI will start to converge on the Fed’s target by the end of 2023, but it could take longer.

Source: FRED, Bloomberg, Insight calculations, February 2022. WHERE MODEL OR SIMULATED RESULTS ARE PRESENTED, THEY HAVE MANY INHERENT LIMITATIONS. MODEL INFORMATION DOES NOT REPRESENT ACTUAL TRADING AND MAY NOT REFLECT THE IMPACT THAT MATERIAL ECONOMIC AND MARKET FACTORS MIGHT HAVE HAD ON INSIGHT’S DECISION-MAKING

The Fed potentially has limited ability to return CPI to its target in the medium term

If house prices continue to rise at a strong pace, we expect this to drag rents up. If the Fed instead raises rates enough to contain the housing market, it will likely result in higher mortgage rates, which would potentially drag rents up instead.