The Fed’s preferred inflation gauge cooled in April, but prices could heat back up this year.
High housing costs will prevent inflation from coming down, says Stifel’s chief economist.
A rate hike could be in the cards by the end of the year, she predicted.
The Federal Reserve’s favorite inflation measure, the personal consumption expenditures index, cooled in April, but there’s a corner of the economy that may still be a problem for the central bank.
Lindsey Piegza, Stifel’s chief economist, believes inflationary pressures will pick up in the second half of this year and potentially lead to a rate hike. That’s because the still-hot housing market could hobble further progress on inflation, she said.
April’s PCE reading of 2.1% is the lowest since March 2021, and below consensus estimates of 2.2%.
But zooming in, other recent inflation data shows that the housing market isn’t seeing the same kind of disinflationary trends. In April, the consumer price index rose 2.8% year-over-year, but the shelter component rose 4%.
Piegza said she sees high housing costs as the biggest driver behind inflation.
“It’s going to be very difficult for the Fed to achieve a sustainable 2% level without further reprieve in housing costs,” Piegza said in an interview on Bloomberg TV Friday morning.
The housing picture hasn’t improved much in recent months. Economic uncertainty has stymied buyer demand as people hesitate to make big-ticket purchases.
“Price pressures have slowed, but nominally, prices are still very elevated as would-be homebuyers face near-record low affordability rates, so there’s still a lock-out effect,” Piegza said.
Existing owners are also hesitant to sell in a market where they could be giving up a low mortgage rate for a much higher one, substantially increasing their housing costs. This has been referred to as the mortgage “lock-in” effect in recent years.
“That lack of mobility both into and out of the housing market is going to slow any further progress for the price pressures that we’re seeing in the shelter component,” Piegza added.
Higher inflation and rates
As housing costs continue to stay elevated and the impacts of tariffs become more pronounced in the economy, Piegza expects inflation to creep up.
Others have voiced similar concerns recently. Jeffrey Roach, chief economist at LPL Financial, expects the latest PCE report to be the lowest inflation print the market will see for the rest of 2025.
“It’s as good as it gets since prices will likely reaccelerate in the coming months,” Roach wrote in a note Friday morning.
In this scenario, the Fed will want to keep rates high to cool the economy down.
In Piegza’s view, if the Fed is planning to cut rates at all this year, it needs to act fast. Slowing GDP growth and an improving inflation outlook for now could give the Fed a window for a 25 basis point cut in the next month or so.
However, Piegza sees higher inflation later this year “removing any window of opportunity for rate cuts and potentially shifting the conversation back to rate hikes by the end of the year,” a development that would lead to higher mortgage rates and further exacerbate the lock-in effect.
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