The recent CPI and jobs reports suggest the Federal Reserve will likely cut interest rates in the coming months due to easing inflation, particularly in shelter costs, and a cooling labor market, supporting a bullish outlook for equities, especially in tech and productivity-driven sectors.
Forecasting models combining various market indicators suggest that shelter inflation, which has remained high even as other components of inflation have fallen, is likely to slow significantly over the next 18 months. The slowdown in the housing market, including house prices and rents, due to rising interest rates is expected to have an impact on future shelter inflation. However, there is uncertainty surrounding these forecasts, and the relationship between asking rents and shelter inflation is complex. The Federal Reserve aims to reduce overall inflation, and if shelter inflation persists at current high levels, it could pose challenges in achieving this goal.
The March US inflation report, to be released on Wednesday, will reveal whether the strong disinflation forces seen late last year reemerged last month. Used car prices have been rising in recent months, but that has not been reflected in the consumer price index, where used cars and truck prices have retreated for the past six months. Analysts anticipate that changed last month. One other sector to watch is shelter, where private sector measures of rent prices have steadily dropped. Overall inflation is expected to be 5.2% in the 12 months through March, down from the 6% the prior month.