Source: Bloomberg

An important part of the inflation undershoot during the past few months has come from unexpectedly low shelter inflation. In various forms, shelter makes up about 40% of core CPI. Shelter inflation as measured by the BLS follows the Case-Shiller home price index with a lag (I use a polynomial distributed lag of a year). The deceleration in housing price increases after the post-crash has led to some moderation in the shelter inflation rate.

Last month, though, we had an extraordinarily low number for shelter inflation of just 0.14%. Mean reversion to the inflation trend alone would take tomorrow’s number above 0.2%. That could be the difference between a benign number and an alarming one.