Rent of new lease inflation is cooling in US. The key word is new lease.
Housing is the biggest item on a household budget. Any change of inflation direction is significant. However, lease is usually a year, so the change on the new lease got buried in the existing leases signed within the 12 months. This time lag was one of the reasons why inflation hike was not shown previously in the regular indicator CPI – Consumer Pricing Index. This delay makes central bank’s job even harder to manage inflation. That’s why a new housing cost index was built to track the rent of new lease specifically. What a great idea!
However, I can’t find statistics on new rent inflation in Canada. Hope they create this new indicator for Canada too soon.
Why is inflation target 2%? Why is not 3% or 4%? It was first introduced in New Zealand in 1989 when inflation there was more than 7%. In the end of 1991, it was down to 2%. It seems like a success, so the central banker of New Zealand promote it to other central banks around the world. I guessed that there must be an annual central banker conference at an exotic place somewhere. 😊 Then the 2% inflation target was adopted widely around the world.
Why not 1%? Someone said it is a bit too low. Now, some suggested 3% because it gives more room to reduce it to stimulate the economy during recession. I guessed that was the hard lesson in the last decade when inflation was so low, the real interest rates was negative. Basically, there is nowhere to go to reduce it further. 3% is still not too high that hurt low-income or fixed-income people.
However, now it is not the time to change the target because central bank’s credibility will be questioned. This credibility is worth billions of dollars. It seems that the health of global economy and people’s livelihood and peace of mind depend on it.