Economy

If President-elect Donald Trump is going to push inflation back down to a more tolerable level, he will need help from housing costs.
It’s not clear that inflation is consistently and convincingly headed back to the Federal Reserve’s 2% goal, at least not until housing inflation eases even more.
The average national rent in October stood at $2,009 a month, down slightly from September but still 3.3% higher than a year ago.

Homes under construction in Englewood Cliffs, New Jersey on Nov. 19th, 2024.
Adam Jeffery | CNBC

If President-elect Donald Trump is going to push inflation back down to a more tolerable level, he will need help from housing costs, an area where federal policymakers have only a limited amount of influence.
The November consumer price index report contained mixed news on the shelter front, which accounts for one-third of the closely followed inflation index.

On one hand, the category posted its smallest full-year increase since February 2022. Moreover, two key rent-related components within the measure saw their smallest monthly gains in more than three years.
But on the other hand, the annual rise was still 4.7%, a level that, excluding the Covid era, was last seen in mid-1991 when CPI inflation was running around 5%. Housing contributed about 40% of the monthly increase in the price gauge, according to the Bureau of Labor Statistics, more than food costs.
With the CPI annual rate now nudging up to 2.7% — 3.3% when excluding food and energy — it’s not clear that inflation is consistently and convincingly headed back to the Federal Reserve’s 2% goal, at least not until housing inflation eases even more.
“It would be expected that over time, we would start to see year-over-year slower growth in rents,” said Lisa Sturtevant, chief economist at Bright MLS, a Maryland-based listing service that covers six states and Washington, D.C. “It just feels like it’s taking a long time, though.”

Still rising but not as fast

Indeed, housing inflation has been on a slow, uneven trek lower since peaking in March 2023. Much like the overall CPI, shelter components continue to rise, though at a slower pace.

The housing issue has been caused by ongoing cycle of supply outstripping demand, a condition that began in the early days of Covid and which has yet to be resolved. Housing supply in November was about 17% below its level five years ago, according to Realtor.com.
Rents have been a particular focus for policymakers, and the news there also has been mixed.
The average national rent in October stood at $2,009 a month, down slightly from September but still 3.3% higher than a year ago, according to real estate market site Zillow. Rents over the past four years are up some 30% nationally.
Looking at housing, costs also continue to climb, a condition exacerbated by high interest rates that the Federal Reserve is trying to lower.

Though the central bank has cut its benchmark borrowing rate by three-quarters of a percentage point since September, and is expected to knock off another quarter point next week, the typical 30-year mortgage rate actually has climbed about as much as the Fed has cut during the same time frame.
All of the converging factors post a potential threat to Trump, whose policies otherwise, such as tax breaks and tariffs, are projected by some economists to add to the inflation quandary.
“We know that some of the president-elect’s proposed initiatives are quite inflationary, so I think the prospects for continued progress towards 2% are less sure than they might have been six months ago,” Sturtevant said. “I don’t feel like I’ve been compelled by anything in particular that suggests that targeting the supply issue is something that the federal government can meaningfully do, certainly not in the short term.”

Optimism for now

During the presidential campaign, Trump made deregulation a cornerstone of his economic platform, and that could spill into the housing market by opening up federal land for construction and generally lowering barriers for homebuilders. Trump also has been a strong proponent for lower interest rates, though monetary policy is largely out of his purview.
The Trump transition team did not respond to a request for comment.
The mood on Wall Street was generally upbeat about the housing picture.
“Rents may finally be normalizing to levels consistent with 2% inflation,” Bank of America economist Stephen Juneau said in a note. The November housing data “will be viewed as encouraging at the Fed,” wrote economist Krushna Guha, head of central bank strategy at Evercore ISI.
Still, shelter expenses “continue to be the number one source for higher prices, and that the rate of increase has slowed is no comfort,” said Robert Frick, corporate economist at Navy Federal Credit Union.
That could cause trouble for Trump, who faces a potential Catch-22 that will make easing the housing burden difficult to solve.
“We’re not going to drop rates until shelter costs come down. But shelter can’t come down until rates are lower,” Sturtevant said. “We know that there are some wild cards out there that we might not have been talking about two or three months ago.” More

The US Treasury building in Washington, DC, US, on Tuesday, Aug. 15, 2023.
Nathan Howard | Bloomberg | Getty Images

The U.S. budget deficit swelled in November, putting fiscal 2025 already at a much faster pace than a year ago when the shortfall topped $1.8 trillion, the Treasury Department reported Wednesday.
For the month, the deficit totaled $366.8 billion, 17% higher than November 2023 and taking the total for the first two months of the fiscal year more than 64% higher than the same period a year ago on an unadjusted basis.

The increase came despite receipts that totaled $301.8 billion, about $27 billion more than last November. Outlays totaled $668.5 billion, or nearly $80 billion more from a year ago.
The increase in red ink brought the national debt to $36.1 trillion as the month drew to a close.
On an adjusted basis, the deficit was $286 billion and has totaled $544 billion year to date, an increase of 19%.
Though the Fed has enacted two rate cuts since September totaling three-quarters of a percentage point, interest expenses continue to be a big contributor to the deficit. Net interest expenses totaled $79 billion on the month and are now at $160 billion for the fiscal year, outpacing all other outlays except Social Security, Medicare, defense and health care.
The Treasury Department expects to pay $1.2 trillion this year in total interest on debt.

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The consumer price index showed a 12-month inflation rate of 2.7% after increasing 0.3% on the month.
Excluding food and energy costs, the core CPI was at 3.3% on an annual basis and 0.3% monthly. All of the figures were in line with forecasts.
The report further solidified the market outlook for a cut, with traders raising the odds to 99%, according to the CME Group’s FedWatch measure.

Consumer prices rose at a faster annual pace in November, a reminder that inflation remains an issue both for households and policymakers.
The consumer price index showed a 12-month inflation rate of 2.7% after increasing 0.3% on the month, the Bureau of Labor Statistics reported Wednesday. The annual rate was 0.1 percentage point higher than October.

Excluding food and energy costs, the core CPI was at 3.3% on an annual basis and 0.3% monthly. The 12-month core reading was unchanged from a month ago.

All of the numbers were in line with the Dow Jones consensus estimates.
The readings come with Federal Reserve officials mulling over what to do at their policy meeting next week. Markets strongly expect the Fed to lower its benchmark short-term borrowing rate by a quarter percentage point when the meeting wraps up Dec. 18, but then skip January as they measure the impact successive cuts have had on the economy.
The report further solidified the market outlook for a cut, with traders raising the odds to 99%, according to the CME Group’s FedWatch measure. Odds of a January reduction also edged higher, hitting about 23%.
“In-line core inflation clears the way for a rate cut at next week’s [Federal Open Market Committee] meeting,” said Whitney Watson, global co-head and co-CIO for fixed income at Goldman Sachs Asset Management. “Following today’s data the Fed will depart for the holiday break still confident in the disinflation process and we think it remains on course for further gradual easing in the new year.”

While inflation is well off the 40-year high it saw in mid-2022, it remains above the Fed’s 2% annual target. Some policymakers in recent days have expressed frustration with inflation’s resilience and have indicated that the pace of rate cuts may need to slow if more progress isn’t made.
If the Fed follows through with a reduction next week, it will have taken a full percentage point off the federal funds rate since September.
Much of the November increase in the CPI came from shelter costs, which rose 0.3% and have been one of the most stubborn components of inflation. Fed officials and many economists expect housing-related inflation to ease as new rental leases are negotiated, but the item has continued to increase each month.
A measure within the shelter component that asks homeowners what they could get in rent for their properties increased 0.2%, as did the actual rent index. They are the smallest monthly respective increases since April and July 2021.
The BLS estimated that the shelter item, which has about a one-third weighting in the CPI calculation, accounted for about 40% of the total increase in November. The shelter index rose 4.7% on a 12-month basis in November.
Used vehicle prices rose 2% monthly while new vehicle prices increased 0.6%, reversing the recent trend that has seen those items come down.
Elsewhere, food costs rose 0.4% monthly and 2.4% year over year, while the energy index increased 0.2% but was down 3.2% annually. Within food, the measure of cereals and bakery products fell 1.1% in November, the single biggest monthly decline in the measure’s history going back to 1989, according to the BLS.
The increase in the CPI meant that average hourly earnings for workers were basically flat for the month when adjusted for inflation, but increased 1.3% from a year ago, the BLS said in a separate release.

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LONDON (Reuters) – Global growth will slow in 2025, and offshore investors are set to cut the cash they send to emerging markets by nearly a quarter, as promised policies from incoming U.S. President Donald Trump reverberate through global markets, a banking trade group said on Wednesday.     The threatened tariffs, a stronger U.S. dollar and slower-than-expected interest rate cuts from the U.S. Federal Reserve are already impacting investor plans, the Institute of International Finance (IIF) said.   “The environment for capital flows has become more challenging, tempering investor appetite for risk assets,” the IIF said in its semi-annual report.     The shift is hitting China the hardest, and emerging markets outside China are expected to pull in “robust” inflows in bonds and equities – led by resource-rich economies in the Middle East and Africa. Already in 2024, China marked its first outflow of foreign direct investment in decades, and total portfolio flows to the world’s second-largest economy are expected to turn negative, an outflow of $25 billion, in 2025. “This divergence highlights the continued resilience of non-China EMs, supported by improving risk sentiment, structural shifts like supply chain diversification, and strong demand for local currency debt,” the IIF said. The IIF projected that global growth will moderate to 2.7% in 2025, from 2.9% this year, while emerging markets are set to grow 3.8%. It expects capital flows to emerging markets, though, to fall to $716 billion, down from $944 billion this year, driven primarily by weaker flows to China.    The IIF warned that its base case assumed only selective tariff implementation. If Trump’s threatened 60% tariffs on China – and 10% for the rest of the world – come into force, the scenario would worsen. “A stronger and swifter implementation of tariffs by the United States could exacerbate downside risks, amplifying disruptions to global trade and supply chains, placing additional strain on EM capital flows,” it said.  More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Karthik Sankaran is a senior research fellow in geoeconomics in the Global South program at the Quincy Institute for Responsible Statecraft.There’s been a lot of ink spilled recently over Trump’s threat of 100 per cent tariffs on any country that would “leave the dollar.” Understandably so!While Trump didn’t spell out why, dollar centrality in the international monetary and financial system (IMFS to hipsters) gives the US unmatched powers to surveil cross-border financial flows and curtail them, as acknowledged by Treasury Secretary designate Scott Bessent here:[embedded content]This seems to override the preferences of VP-elect-Vance, who believes the dollar’s centrality has led to unwarranted currency strength and American deindustrialisation. Trump himself also seems to believe this, telling Bloomberg earlier this year that the US has “a big currency problem”.All this suggests a conflict between two views — one might call them the National Security Dollar and the Trade Dollar. But there’s a third critical global role in play — the Financial Stability Dollar. And here, the tussles between the Trade Dollar and the National Security Dollar could have a big impact on the rest of the world. The role of the dollar as the leading denomination for cross-border borrowing and invoicing means that when it is too strong (ie, the Trade Dollar faction loses), it tightens financial conditions in large parts of the world. There are multiple transmission avenues. It hits emerging markets that borrow mostly in dollars by making repayment more expensive, and subjects others with dollar-sensitive investors in their local currency debt markets to capital outflows. A combination of dollar strength and slower global growth can be especially toxic for commodity exporters who borrow in dollars — and there are a lot of them. Interactions across these three roles could become increasingly problematic. So far, markets have reacted to tariff threats by lifting the dollar. And while such strength might dampen the price signals that favour import substitution, it would also offer a partial offset to the inflationary impact of tariffs (something Bessent welcomed in the interview above).  This trade-off makes sense if the fundamental conception of tariffs is based less on industrial strategy and more on the idea that the withdrawal of market access to the US can be used as a cudgel, including for geopolitical purposes. And this seems like an administration that likes its geoeconomic cudgels.Online, there’s a widespread belief that tariffs that lead to a weaker renminbi would exacerbate capital flight from China, alongside the occasional hope that this process would hit the Communist regime’s legitimacy. But to push the country into a deeper economic malaise (more than its own policies already have) would cause a lot of collateral damage China is still the world’s second-largest economy. Any strategy to weaken it would have consequences for countries that compete with its exports and/or are sensitive to Chinese growth and imports. This would include many US allies, with two of the four members of the Quad —Japan and Australia — checking these boxes. Anything that hits China would hit other emerging markets even harder. They would see their currencies weaken in tandem with the renminbi, but without the degrees of freedom that come from what China has — at least $3tn in official reserve assets and more in other quasi-governmental institutions; a debt stock that is largely in local currency held by onshore investors; an immense manufacturing export sector; and local bond yields at just 2 per cent. Life would be a lot harder for countries without those buffers.The above would actually be a relatively restrained geoeconomic outcome compared to some more crypto-friendly ideas floating around the blog/podosphere. One such idea is that the cross-border availability of dollar-based stablecoins could extend the footprint (or dominance) of the dollar by permitting currency substitution (or capital flight) outside the US. This is sometimes presented as an expansion of rule of law/liberty in places that need one or both, and as a private sector version of reserve accumulation that will support demand for US government debt — the natural asset counterpart to the dollar-stablecoin issuer’s liability. This might well be the case, but while easy currency substitution might be a good thing for individuals in some countries, it can be a very bad thing for the stability of those countries’ banking systems.Moreover, stablecoins expand not just the footprint of the US, but also the footprint of its financial cycle, and that is determined to a substantial degree by the Fed’s response to key macroeconomic aggregates within a relatively closed economy. For more than a decade now, many developing countries have grappled with the problem of having their financial cycles determined in Washington even as critical components of their real cycle — commodity demand and prices, for example — are determined in Beijing. A unipolar force driving the global financial cycle alongside multipolar forces driving local real cycles is a bad idea for financial stability, but that seems to be a significant risk here. There’s an argument for a multipolar global monetary system that avoids exactly such a divergence between real and financial cycles across hubs and spokes. But the only place that has come close is the Eurozone, where a common currency is not just a denomination for trade, but also for capital markets transactions backstopped by a central bank that has after 2012 begun to take its lender-of-last Resort function seriously. No one else is close to this — certainly not the BRICS — and that’s a bad thing for global financial stability. What would be even worse is if the proponents of the National Security Dollar actually prevent a multipolar monetary order (presumably with another minor hub in the renminbi at some point in the future) from ever happening. More