The Federal Reserve chairman, Jerome H. Powell, far right, with Esther George, chief of the Kansas City Fed, and John Williams, chief of the New York Fed, in Jackson, Wyo

Those hoping that the chinks of light seen in July’s CPI data from the US would continue in August were disappointed by the big 0.6% monthly rise in core prices. Yet again, the data shows that inflation is a stubborn beast and it is going to take more Fed tightening than most expect to bring it back to target.

The regular Bloomberg survey of around 60 analysts sees a median forecast for the fed funds target rate to rise to a peak of 4% early next year and then be trimmed back to 3.5% in Q4 2023.

Mr. Steve Barrow, Head of Standard Bank G10 Strategy said: "Our forecasts have been considerably above the consensus for some time and, even though that gap has closed now, we still think the market is too optimistic – and that the fed funds target will still have a 4 handle at the end of next year. Our hawkishness has been driven by our reading of inflation".

In some senses, this might seem like a good call, but, in many important respects, it was fairly obvious that inflation was going to consistently come through above expectations. This is because a large part of the CPI – over 30% - relates to shelter. Part of this is rent and a larger part is what’s called "owners" equivalent rent’ which is basically the income people think they forgo from not renting their house or flat. Hence, it is not a "real" price but, at close to 25% of the CPI, it is incredibly important for the overall price index.

We saw this again recently as shelter prices rose a large 0.7%. But why are sharp price rises here "obvious" as we said earlier? They are obvious because this shelter index follows the data on actual rental prices in the market and, as these rise, the shelter calculation starts to slowly rise as well, after a brief lag.

In other words, there’s a clear relationship here; first rental prices rise in the market and then shelter prices in the CPI start to increase. Not only does it show a sharp rise in rents; it also suggests that there’s little let-up in the price increases, and, to us, that means that shelter price increases in the CPI will stay high for some time, probably a good six months, or more.

Even if housing price increases continue at their current rate, which has been around 0.6% per month over the last six months, this category alone would add more than 2% points to the CPI over the next year.In other words, all the other components of CPI prices put together would have to be negative in total to push total CPI to 2% or lower, and that’s not going to happen.

"It may sound obvious now, but this inflationary impulse was always coming and always something that would probably keep price pressures above those expected by the market and the Fed. Of course, there are other elements to inflation as well that are important, like food and energy prices, but when it comes to a sustained decline in annual core inflation back to target, a significant reduction in shelter inflation is just about imperative", said Mr. Steve Barrow.

So, where does this leave the market and the Fed? Once again, clutching at straws when it comes to clear signs that price pressures are receding. It will likely mean a 75-bps rate hike from the Fed next week and probably a higher peak, or a more long-lived peak, than the market expects. Ironically, the CPI for shelter tends to be positively associated with the level of interest rates, especially mortgages, which seems logical. But in theory, at least, it suggests that the more the Fed hikes and the more mortgage rates rise, the more we might see shelter prices rise as well. This complication aside, the Fed seems to have little option other than to press on with sharp rate hikes, and these seem set to lift yields and the dollar.

Many worry that the Fed risks overdoing the tightening. That may well prove true, but, just as the clues to stubborn increases in inflation were to be found in rental prices, so the Fed and the market might want to keep a close eye on rental prices going forward as they seek to take advantage of the fact that rental prices will fall first and shelter prices will start to fall later.