Rent and wage inflation
Source: Zillow Observed Rent Index, Bloomberg Finance, L.P., as of August 31, 2022. Wage growth represented by average hourly earnings.
- Following their decidedly hawkish pivot at Jackson Hole, Fed policymakers took another major step this week, hiking rates by 75 basis points as expected and preparing markets for further significant hikes. In his post-statement press conference, Chair Powell emphasized that there would be more pain to come, noting the window for a soft landing has diminished.
- He left little doubt about the Fed’s resolve, emphasizing that the labor market must soften while the housing market needs a “reset” as both areas have been the epicenter of core inflationary pressures over the past year.
- The chart highlights the significant work the Fed still has ahead of it in both categories. As it shows, policymakers have clearly achieved some success in tempering rental costs (part of the larger shelter category), yet annual rent inflation of about 11% remains far above its pre-pandemic trend.1
- While the Fed expects unemployment to climb to 4.4% next year, the labor market has yet to show any significant sign of cooling. Average hourly earnings growth (black line) has come in at 5% or higher all year while initial unemployment claims have remained stubbornly low.1
- To be clear, the Fed could achieve its inflation goals while guiding the economy to a soft landing, but recent data highlights how tight the path there is. In the meantime, investors may be wise to remain focused on alternative investments that have historically offered the potential to protect capital and generate real returns within volatile markets.