Zillow says it's premature to think about pausing rate hikes in 2022

Zillow says it's premature to think about pausing rate hikes in 2022

Zillow Group Inc. Z is reporting that a decline in rent inflation can already be predicted in 2023, despite consumer price index data showing rent prices accelerating in 2022.

In the last Fed meeting ending on Nov. 2, Chairman of the Federal Reserve Jerome Powell said it was premature to think about pausing. When you hear lags, think about it. I think it is premature to think about or talk about pausing our rate hikes. What Happened: As the Fed's two main inflation indicators are the consumer price index and the personal consumption expenditure price index, both indexes are backward-looking, using the past month's data to help with future decisions.

The Zillow Observed Rent Index ZORI proved to be a good predictor of actual inflation in both indexes, while the Zillow Home Value Index ZHVI can help predict movement in owners equivalent rent OER, which carries even more weight in inflation due to homeowners far outnumbering renters.

According to Zillow, the ZORI showed that rent growth peaked at 17.2% in February 2022 and declined to 10.8% in September, pointing to a downward trend. As the ZORI shows signs of deceleration in rent growth, it will be interesting to see when the PCE and CPI show signs of a slowing in year-over-year rent growth.

The September CPI revealed that the rent of a primary residence in September increased by 0.9% month-over-month.

San Francisco Fed researchers find the strongest correlation between CPI rent and ZORI at a 12 month lag, making February 2023 a candidate for a highly likely watershed moment in CPI rent inflation, according to Zillow.

Since monthly growth in the CPI rent component is averaging an 11% annualized rate, it appears that the deceleration in CPI rent inflation is a few months away, since monthly growth would need to drop sharply in order to fall below last autumn's rate, per Zillow.

See Also: How Many Hours The Average American Must Work To Pay Rent?

Why It Matters: Jeremey Siegel, Professor of Finance at the Wharton School of Business, joined CNBC's Squawk Box on Monday morning and reported that Powell said he is using the housing indicator that looks at past data.

The housing sector is 40% of the core inflation, but when you look at the forward indicators they are showing negative prices in rental growth, while the backward-looking one shows positive price growth in rents, Professor Siegel said.

Siegel thinks the Fed will eventually see this discrepancy, and he is shocked as the forward indicators show that inflation is down.

When the Fed revealed they were more hawkish than in September, Siegel reported that since September we have not had any evidence of prices going up, besides backward indicators.

The next CPI report will most likely show an increase, but Siegel stated that Standard and Poor s Case Shiller Index, Rental Indexes from Zillow and housing starts are all going down.

Siegel thinks that this is an important issue to interpret where the forward indicators are pointing to inflation, which is why the market thinks Powell will eventually see the light and become more dovish.