The significant impact of housing on the Fed’s inflation challenge: Morning Brief

The Federal Reserve’s battle with inflation is centered around the housing market, according to a recent report by Wells Fargo economists Sarah House and Aubrey George. The gap between the Fed’s preferred inflation measure and the most popular measure is currently at a full percentage point, with housing costs playing a significant role in this disparity.

The core Consumer Price Index (CPI) showed a 3.8% increase in prices over the past year in February, while the core Personal Consumption Expenditures (PCE) price index rose by 2.8% during the same period. The Fed targets 2% inflation and focuses on the core PCE measure, which excludes food and energy.

Housing costs make up a significant portion of the inflation measures, with housing costs accounting for 43% of the core CPI and 17.5% of the core PCE. The difference in how these measures account for housing costs contributes to the gap between them.

Despite the significant gap between the two inflation measures, the Fed remains focused on achieving its 2% inflation target. However, the spread between CPI and PCE could make it more challenging for the Fed to reach this goal.

Recent strong manufacturing data showing a rise in input inflation for manufacturers has led to speculation about a potential rate cut in June. This suggests that the Fed’s inflation challenges extend beyond just the housing market.

Overall, the Fed’s battle with inflation continues, with housing costs playing a crucial role in the ongoing struggle to achieve the central bank’s inflation target.