Despite the fact that inflation data for January was worse than expected, and that rate cuts expectations have plummeted, the market has regained strength and continues to go up. If we go beyond the headline, there may be an explanation why the market expects inflation to continue to go down and rate cuts to readjust. The two components of CPI related to shelter, are the Owners Equivalen Rent and the Rents of Primary Residence. Both are surveys and move very slowly. Other private indicators related to Shelter, such as Zillow or Case-Shiller are more responsive to changes in rents and prices, as you can see in the chart below. And they also work as a leading indicator for OER and RPR. In the chart below you can see that if both of them continue to follow the private indicators, the next move for both components of CPI should be downwards, and they account for 35% of the index.
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Source: Bianco Research.
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