Is the rent still too damn high?

Happy May-inflation-data day everyone!

Goldman Sachs economists have previewed today’s US consumer-price index report, highlighting a few underlying inflation components and their estimates for those figures.

The most important is the cost of shelter, which was the largest single contributor to April’s acceleration in headline inflation, the BLS said last month.

Shelter costs could decelerate in today’s report, the bank says, flagging some “softness” in rents for online home listings. GS excludes hotels from its gauge of shelter inflation, so the following analysis isn’t entirely comparable to the BLS’s figures. But the bank finds that shelter has been a very large contributor over the past year:

We forecast additional slowing in shelter inflation. We believe the March/April slowdown in shelter categories was genuine and reflected a waning boost from post-pandemic lease renewals — or equivalently, the catch-up of continuing-tenant leases to market rates. Looking ahead, the softness in online rent listings shown in Exhibit 4 suggests additional disinflation in tomorrow’s report and beyond. We forecast +0.50 per cent for both rent and OER in tomorrow’s report (vs. 0.51pc-0.52pc on average in March/April and the winter monthly trend of 0.7-0.8pc).

So a slowing of, uh, one to two basis points may not significantly move the needle for the broader report.

Indeed, the bank’s economists are forecasting a 0.44 per cent monthly increase in core CPI for May, above the Wall Street consensus of 0.4 per cent. That would make for a 5.3 per cent annual jump in core CPI and 4.2 per cent increase in headline CPI.

In other words, GS certainly isn’t arguing that inflation is beat/whipped/etc. (Related: the bank’s economists published a separate note on a debate over whether the Fed should respond to higher inflation by simply increasing its inflation target. As you might guess, they don’t like the idea.)

There are a few other notable categories that could make outsized contributions to persistent inflation in today’s report.

Hotels are one. GS’s economists expect the cost of away-from-home lodging to rise 2 per cent in May from the prior month, arguing that Americans started their summer vacationing early this year. They cite data from hotel-tracker STR Global showing that rates hit a record high in May:

Used-car inflation could also come in hot, even though the Manheim index of used-car prices has retreated somewhat. That’s because Manheim is a wholesale auctioneer, meaning it sells to car dealers, and it’ll take some time for dealerships to adjust their rents consumer used-car prices lower.

The bank expects car-insurance costs to keep climbing in May, too. (That market is not pretty, as we’ve covered.) As GS puts it: “we forecast a 1% increase in the car insurance category, as carriers continue to offset higher repair and replacement costs.”

Even so, the economists are forecasting “monthly core CPI inflation to step back down to the 0.3-per-cent range in the next few months, reflecting declines in used car prices and continued moderation in shelter inflation,” they wrote. “We forecast year-over-year core CPI inflation of 4.2 per cent in December 2023 and 2.8 per cent in December 2024.”

2.8 per cent almost sounds like victory after the past few years. And now that we think of it, that may provide some insight into why certain commentators are urging the Fed to raise its inflation target.