Inflation is rising at its fastest annual pace since the early 1990s, yet is relatively unaffected by skyrocketing housing prices. That eventual impact will likely pressure inflation, delaying an anticipated peak in prices into late 2022.

The looming collision from a white-hot housing market might boost annual inflation growth above most forecasts and further complicate the post-pandemic economic recovery. Ultimately, it may sink the argument from Federal Reserve officials that inflation is transitory, key in the central bank's plan to tighten its ultra-loose monetary policy and begin to taper its $120 billion in monthly bond purchases as soon as November.

"There is an upside thrust that could continue well into 2022," said Jeff Weniger, head of equity strategy at investment management firm WisdomTree, in an interview.

Lagging indicator

At issue is the market's preferred inflation metric, the consumer price index, which has recorded an average increase of 5.4% year over year each month since June.

The run-up in housing prices, however, is not yet evident in the index.

The housing component of the index has risen only 2.9% year over year on average during each of those four months. Housing prices, meanwhile, rose more than 18% on average each month over the same stretch, according to Redfin, a real estate brokerage.

The S&P CoreLogic Case-Shiller Index, a measure of U.S. home prices, increased by 19.7% from July 2020 to July 2021. Through the first seven months of 2021, the index rose each month by an average of 15.3% year over year.

"You could drive a truck through that gap," Weniger said.

Housing units are considered capital or investment goods, not consumption items, and housing sales are not included in the CPI's basket of price data.

Shelter makes up about one-third of the weight of the index. The category is largely measured by changes in rent of a primary residence and a component known as owners' equivalent rent of a primary residence, or an estimation of how much rent a homeowner thinks they charge for their house.

These measures might lag housing sales by 12 to 18 months, according to James Knightley, chief international economist with ING.

Since rents typically change only once a year and at different times, it takes months for momentum to build in price changes, Knightley said. Homeowners are often lost on what their house might rent for, since few monitor changes in their rental market.

"People typically consider home price, mortgage cost, insurance and upkeep in their answer and again people tend to be quite slow to respond to month-to-month changes," Knightley said. "It is when they notice big changes — such as house prices rising 20% — that they then change their assessment on what rental equivalent they would achieve."

By the time housing prices are reflected in the consumer price index, it may add 1% to annual inflation, Knightley said, potentially bringing the index over 6% for the first time since 1990.

Surging inflation

Median inflation expectations for the near term, or about one year ahead, climbed to 5.3% in September, according to the latest results from the Federal Reserve Bank of New York's Survey of Consumer Expectations. It was an all-time high for the survey.

Breakeven inflation rates — yields on regular Treasury bonds minus yields on Treasury Inflation-Protected Securities — indicate that investors expect inflation to climb significantly higher than they did a year ago. Breakeven inflation rates this week were at a 2.54% average over the next 10 years and a 2.71% average over the next 5 years, up 83 and 118 basis points, respectively, from about a year earlier.

These expectations might climb further if the housing price rally continues. This may complicate the Fed's timing on tapering its ongoing asset purchases and eventual plans to raise rates, one of its tools to combat rising inflation. The Fed plans to keep rates near zero until its bond-buying program is concluded.

Housing prices will likely climb 16% by the end of 2022, after a 20% spike last year, according to a Goldman Sachs forecast.

"Of all the shortages afflicting the U.S. economy, the housing shortage might last the longest," Ronnie Walker, a Goldman economist, wrote in an Oct. 11 report detailing the forecast.

With housing prices on the rise, the owners' equivalent rent data within the CPI will likely show a "slow, steady build over a period of months rather than the sudden burst we've seen in actual home prices," said Greg McBride, senior vice president and chief financial analyst for Bankrate.com.

"Rising home prices are only now beginning to show up in CPI and will continue to be a big driver of the inflation index for much of the next year as higher rents and owners equivalent rent make their way into the mix," McBride said.