The housing category in CPI is calculated using mostly rental prices. With prices on new rental properties flatlining earlier this year, many expected CPI Housing to quickly moderate. It is however worth remembering that with the very quick increase in new rents, the average level of all rentals will lag behind. Since early 2020, new rents have increased by 30%, while all rents as measured by CPI is only up 20%. Even with no further increases in new rental prices, there is still ample upside in housing component of CPI. And with house prices up 45% since before the pandemic, it would not be surprising to see new rents increasing from current levels.
The largest share of the core CPI basket is services. Labour is by far the largest cost for most businesses in this industry, so it is not surprising that we find a strong correclation between wage growth and CPI services less energy. Wages have been pushed higher by a combination of labour shortage, high demand and high overall CPI. As all of these factors are abating, we are also seeing wage growth cooling. The imbalance in labour supply/demand is improving, but with unemployment rate at 3.8% and wage increases around 5.5% currently, it will take much longer than a year to lower service inflation to 2%.- Nordea
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