The Fed is counting on a decline in US shelter inflation. If that doesn’t pan out, they’re in trouble.

Fortunately, it’s already panned out. Or at least that’s what we’re told. This is the kind of disinflation that’s “in the pipeline,” to use the preferred vernacular in some corners.

How accurate is that contention? Well, no one knows if we’re honest. You’d think a prerequisite for calling something a foregone conclusion (and many have described shelter disinflation in just such terms) would be establishing that it can’t be otherwise. But this is economics, and as I never tire of reminding readers, economics isn’t a hard science. Anything can happen and nothing is a foregone conclusion.

That said, there are (very) good reasons to believe the shelter disinflation story, and Goldman walked through a few of them in a note dated July 2. The figure below shows what the bank described as “the most accurate and timely online rent measures,” all of which have decelerated from the “eyepopping” (Goldman’s word) pace observed around this time two years ago to levels not materially different from the pre-pandemic rate.

If you ask Goldman, it’d be a mistake to extrapolate an outright collapse in shelter inflation. Those measures may “overstate” what investors can realistically expect in terms of deceleration on the relevant CPI and PCE measures, the bank said.

They cited “continued upward pressure on lease renewals for existing tenants,” but noted that the trend nevertheless “validates the stepdown in monthly shelter inflation over the last three months and argues for additional slowing in coming quarters.”

That’s what really counts. You just want to be sure things keep moving in the right direction. Goldman also said that when it comes to renewals, the majority of the new tenant premium over existing leases has closed, which suggests less in the way of upward pressure.

All in all, the bank sees shelter inflation slowing to a 5% annualized rate by December, just half the monthly annualized rate seen late last year.

I suppose I should note that after four consecutive MoM declines, the Zillow Observed Rent Index notched four straight monthly increases. The latest print (May’s) was a 0.64% jump. But the MoM ZORI series looks like what you get when you Google “amplitude sound wave” and click on the images section. The YoY ZORI pace, at 4.8%, has slowed dramatically.

“The subdued pace of rent growth this year may represent some mean reversion after the very fast rent growth in 2021 and 2022 that accompanied the reopening of the economy, when Americans’ household balance sheets were flush with cash,” Zillow’s Jeff Tucker wrote. “Now, renters may be tightening their budgetary belts and doubling up with roommates as higher costs and lower excess savings make it less tenable to rent a place of their own.”

The typical rent across the country in the US is around $2,050, according to Zillow. That’s something like 10 times what I remember paying when I was a young(er) man. I distinctly remember spending more money on cognac than rent. That’d be harder to do these days. Assuming the same cognac. Assuming the type of cognac I’d be drinking if I still drank, it’d be quite easy, though.