As we discussed earlier, monetary policy and inflation and a slowdown in wages as a tighter the communications from policymakers have policy rate environment begins showing its full squarely focused on inflation, and policy rates are effect on the economy in 2023. currently at levels broadly considered restrictive for economic activity, with more likely in coming Given such price and labor dynamics of late, quarters. That said, we’re starting to see signs our monetary policy outlook has become more of progress in the fight against inflation. Prime hawkish, and we expect a “higher for longer” among these is housing activity, where signs of policy rate environment ahead. Our baseline slowing momentum are already evident. Given outlook envisions the policy rate tightening to the lag with which housing activity filters into reach a peak of 5% by early 2023 and remaining inflation, this will eventually result in a slower at similar levels throughout the year. Given the pace of shelter inflation sometime in the second uncertainty that the inflation path has posed half of 2023. In early 2023, shelter inflation will thus far, we expect the Fed to favor a pace of remain strong, reflecting the still-robust housing tightening based strongly on data dependence, market momentum of early 2022 (Figure I-17). with wage and inflation expectations being key The stronger gains in shelter inflation, in our view, watch variables that will influence the Fed’s will be offset by a faster deceleration in goods ultimate path. FIGURE I-17 Both traditional and alternative data suggest a slowdown in shelter inflation only after mid- to late 2023, keeping core inflation elevated at year-end 2023   OER hange‚  hange (LHS, -mont c c average, ge ge MoM%) a ­  a t t en en Traditional c €  c indicators per per   (LHS, estimate h h t t of OER MoM%) mon  mon - - Alternative er– – er data leading v v o o - - indicators h–€ – h t t (RHS, MoM%) n n o–­ – o M  ƒ ­   M Notes: Owners’ equivalent rent (OER) represents the CPI subcomponent of owner-imputed rent, which holds the highest weight in core CPI. Traditional indicator estimates of OER MoM% are based on a Vanguard proprietary model used to forecast OER MoM gains. Alternative data indicators contain publicly provided data from private rental and housing firms. Weighted average of MoM changes in alternative data has been a relatively good signal of turning points in the monthly pace of shelter inflation. Sources: Vanguard calculations, based on data from Zillow, Apartment List, the Bureau of Labor Statistics, the U.S. Bureau of Economic Analysis, Refinitiv, and Moody’s, as of October 31, 2022. 22