Rent Inflation Set To Soar This Summer

The latest PCE report from April completed a couple of recoveries and almost completed another. When it comes to compensation, spending, and inflation, the pandemic losses have been all but recuperated. Remember, the people who are able to work from home get paid the most. They have an outsized impact on compensation and spending. Clearly, the bottom third of the labor market hasn’t fully recovered. The hardest-hit areas of the economy haven’t recovered and neither has the entire labor market.

Specifically, compensation is 0.2% above the trend it was running at prior to the pandemic. Real personal consumption is still 1% below the trend. Finally, as you can see from the chart below, the core PCE price index is 0.2% above the 2% trend growth rate it was running at prior to the pandemic.

Obviously, this opens the Fed up to questioning about its current dovish monetary policy. The entire premise of its new framework is for core PCE inflation to make up for prior years of weakness. If it has made up for its below-trend growth rate, there is more pressure to turn hawkish. Luckily, the market has been pricing in hikes before they will likely occur. If the Fed were to end QE and hike rates quicker than it has said, it wouldn’t concern markets much.

Rents Are Recovering

Cities are recovering. There is no longer a need to leave the city since the vaccines have stopped the spread of the pandemic. We are within a couple of months of people returning to offices and restarting the much-dreaded work commute via public transportation. As we predicted, rent prices are improving as well. This is going to be a huge driver of core CPI in the summer.

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