Rising Rents Pose Stubborn Challenge for Central Banks in Inflation Fight

Surging Rents Pose Challenge for Central Banks in Tackling Inflation

Rising rents across developed economies are proving to be a major hurdle for central banks in their efforts to combat inflation during the current tightening cycle. In countries like the US, UK, Canada, and Australia, soaring housing costs are preventing inflation from decreasing closer to the targeted levels set by central banks. The concern is that as workers struggle to cover the increasing cost of living, they may demand higher wages, further complicating the fight against inflation.

The recent trend shows that the disinflation momentum witnessed in many developed economies last year has hit a roadblock. This has led financial markets to either adjust their expectations for interest rate cuts, as seen in the US, or anticipate additional rate hikes, as in Australia.

Shane Oliver, chief economist at AMP Ltd. in Sydney, explains that rents, like inflation, are a lagging indicator of the economic cycle and are slow to decrease. The situation varies across different regions, with continental Europe facing less of an issue compared to countries with rapid immigration programs and building shortages, like Australia.

In Australia, Reserve Bank Governor Michele Bullock highlighted that strong immigration has added pressure to the housing market, leading to a rise in rental costs. The Reserve Bank of Australia’s latest economic forecast report indicated that rent inflation is expected to remain high until at least mid-2026.

Similarly, the UK is experiencing significant challenges with rising rents, which have climbed by a fifth since 2022 and are currently increasing at their fastest rate on record. The Bank of England is closely monitoring pay growth and services inflation, aiming to balance these factors against rising rent costs.

In the US, the Federal Reserve is also closely watching rental costs, as it accounts for one-third of the CPI inflation index. Fed Chair Jerome Powell believes that easing rental costs will eventually impact broader price data, providing an opportunity for policymakers to lower interest rates.

However, the challenge remains significant, with households expecting rent costs to continue increasing in the near future. A shortage of affordable housing stock in some regions has kept prices elevated, further complicating the inflation outlook.

While there may be some moderation in inflation levels, experts warn that significant cooling is unlikely without continued efforts from central banks. As the global economy grapples with the impact of rising rents on inflation, policymakers face a complex challenge in steering the path towards economic stability.