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Paul Krugman said a cooldown in the cost of rent suggests US inflation is starting to flatten, speaking as investors count down to a key price data release.
Any slowdown in monthly rents could significantly curb inflation and allow the Federal Reserve to soften its approach to interest rate hikes, according to the Nobel Prize-winning economist.
Apartment rent prices are "more important than people realize for economic policy," he said in a tweet Sunday.
"Rents — market rents and imputed rents on owner-occupied housing — are key drivers of all measures of core inflation," he added.
Krugman shared a recent report by Apartments.com that showed monthly rents falling 0.1% — and by over 1% in Nashville and Austin.
The Labor Department's Consumer Price Index report for August is due Tuesday. Economists expect headline inflation rose to 8.1%, down from July's 8.5% print.
The Fed uses CPI as its preferred inflation measure, so any signs the rate is easing could encourage the US central bank to take a softer stance on interest rate hikes at its September meeting.
A slowdown in rents shows that "core inflation — which drives Fed policy — [is] on course to flatten too," Krugman wrote.
Krugman has argued that the market's inflation expectations remain in check. That allows the Fed to raise interest rates gradually and reduces the the risk that it crushes economic growth or causes unemployment to soar.
"We can have a fairly soft landing that doesn't impose massive suffering," he said last week. "I'm for gradual rate hikes until there are clear signs of slowing underlying inflation."
"We need some cooling but not a Volcker-style era of pain," Krugman added on Saturday, referring to previous Fed chair Paul Volcker, who hiked interest rates to 20% in the 1980s to bring soaring prices under control. While inflation fell to 3.4% from a peak of 9.8%, the US subsequently suffered a recession where unemployment rose as high as 11%.
