The housing sector could be the key for the Federal Reserve's campaign to tame inflation down to its 2% target rate, which Fed Chair Jerome Powell characterized as being on a "sometimes bumpy path."

Yahoo Finance Head of News Myles Udland joins the Morning Brief to break down home prices' pivotal role in CPI (consumer price index) and PCE (personal consumption expenditures index) inflation data and how Fed officials are considering the housing market while balancing its inflation-labor market dual market.

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

- Housing playing an outsized role in the Fed's challenge to bring down inflation. There's a Wells Fargo report out that took a deep dive into the gap that we've seen between core PCE and core CPI. Here to explain, Yahoo Finance's Myles Udland. Myles, you wrote about this in our morning brief earlier this week. Just talk to us about the discrepancy that we're seeing and this outsized role as you put it that housing is now playing in the Fed's fight to tame inflation.

MYLES UDLAND: Yeah. So if we look at that first chart of the gap between core PCE and core CPI, 1% point is the gap right now. Historically, the gap's has been about 3/10% PCE on the lower side. So CPI in general, has been a little bit higher, hotter, however you want to say it but by a significantly-- by a significantly smaller margin than we currently see.

Now everybody knows housing costs are a big driver of inflation overall. The BLS called out in its last CPI report that housing costs were over 2/3 of the annual increase in CPI we saw and that's really creating this problem for the Fed where core CPI is still at 3.8%, almost double their target.

Now core PCE is running at 2.8% year over year, above the 2% target but closer to there. And if we saw that chart where you see the share that housing plays in each measure, over 40% of core CPI is housing costs, up 5.9% year over year. Just 17.5% of PCE is housing costs, which are up 5.8% a year in that measurement.

And so while the Fed cares about PCE and they will say they're focused on that measure, it's going to be challenging. And I mean, it is challenging at this point for the Fed to make this argument for needing to cut rates with the more popular inflation measure, CPI, still at 3.8%, even when, you know, trimmed down for the Fed's preferred way to look at it.

So they are confident-- everyone's confident, housing costs, it's kind of a lag, yada-yada. We've been through the whole rent story, all this, that, the other. But that gap is a major challenge. That measurement issue is a major challenge for the Fed and trying to communicate why they need to cut rates.