What Does The Latest CPI Inflation Report Tell Us?
May 12, 2023
The Federal Reserve released the latest inflation report May 10. Here's what it had to say.
After taking extraordinary measures raising rates for the 10th time since March 2022, the latest inflation figures show some positive signs that inflation is in fact cooling; however, some areas of the economy are still seeing YOY increases in cost, far above the Fed’s ideal 2% target.
The consumer price index (CPI) measures household prices for goods and services.
The report revealed a sustained slow down in price pressures for American consumers, with April seeing the lowest reading in two years. The consumer price index (CPI), which measures inflation, overall rose 4.9% compared to the same time last year, making for the tenth straight month of decline. Although there was a decent 12.2% drop in gas prices giving families a much needed relief at the pump, the decrease was largely offset by higher increases in staple items such as eggs, car insurance, pet food, and bakery products. Overall the report validated assumptions that the road to normal inflation levels will be bumpy, and somewhat uneven.
By measuring how rapidly prices change across the economy, the CPI can give an accurate reading on price fluctuations on everything from haircuts and concert tickets, to movie tickets, concerts, and pet food. Because the overall inflation rate went up 4.9% compared to a year ago, consumers are spending more than they were a year ago. And while Wall Street economists are desperately forecasting a rate pause to take effect soon, the Fed is still about 3% away from they’re acceptable inflation target of 2%; although it does show inflation has significantly slowed from the 9.1% peak almost a year ago.
As supply chains continue to normalize, the report was mixed for consumers and drivers as prices rose 3% in April and grocery prices dropped for a second straight month. And although rental cost rose, they rose at a slower pace indicating the higher rates are impacting rental rates and mortgage demand. After a 9-month downward trend, used car prices jumped 4.4%, airfare dropped 2.6% in April, and hotel prices dropped 3% after four months of increases.
Where the inflation is in one chart. Notable year-over-year price changes.
Even though the report revealed inflation down just slightly, the Federal Reserve signaled in its meeting minutes that it’s likely to pause its aggressive policies that raised rates over 5 points in a little over a year. Fed officials see less work for the central bank to do in light of more restrictive lending standards implemented in response to the collapse of Silicon Valley Bank and two other banks. Leading economists predict the latest CPI report keeps the Fed on track to pause rate hikes, but shows persistently high inflation could stop the Fed from cutting rates in response to a recession for longer periods of time.
Overall, prices continue to rise month-over-month. And, although inflation for goods has been dwindling since COVID-related supply chain bottlenecks improve, some items, such as apparel and used car prices, jump after nine months of decline. Core prices increased .04% from March, which followed a similar increase from the previous month. (Core prices exclude volatile food and energy items.) And while services prices are predicted to rise as consumers travel and eat out more frequently, many of those costs slowed their increases in April.
Why Is The Federal Funds Rate Important?
Our entire banking system is based on the federal funds rate, which is the rate at which banks lend money to each other overnight. Overnight lending is when banks lend money to each other through the federal funds market. When banks need to borrow money for a variety of reasons, such as to meet reserve fractional requirements, the interest rate on the loan is called the federal funds rate. Borrowing money from other banks allows the banking system to operate normally, and consumers are usually unaware this occurs. The interest rate on this inter-bank lending directly impacts the rates banks offer to consumers for loans.
The primary concern for most shoppers is gas and groceries, the staples of living and working.
Gas Prices
Although prices increased in April, gas prices have fallen in recent weeks, and are down 12.2% YOY. The average gallon costs $3.53 nationally on Tuesday, which is down from $3.60 a month ago.
Grocery Prices
As you can see, families are finally getting some relief at the checkout line at the grocery store. And while some staples continued to climb (chicken +.05%, uncooked ground beef +0.6%), grocery prices overall went down 0.2% for a second straight month, as the yearly rise dropped to 7.1% from 8.4%. Wheat and corn has dropped in recent months due to less global demand. Eggs finally say some price relief by dropping 1.5% in April, the third straight month of cooling after a sharp bird flu-related increase. Eggs are still up 21.4% YOY, and pork prices fell 1.2%; and seafood and fish declined 0.7%, while bread was down 9.3%. Again, more positive signs to point to that the Fed’s somewhat aggressive policy is working to curb overheated prices that matter most to everyday people.
Mortgage Rates
At the end of the day, it’s still anyone’s guess as to what rates will do over the next 12 months, unlike in April of last year when we very accurately forecasted rates going to 7% with the Washington Post. Back then the Fed was fighting a wildfire with a waterhose, not equipped with the right tools or strategy to put it out. Then, they pivoted to a (somewhat) aggressive posture, shocking the market and driving many large and small mortgage companies out of business, in addition to banks.
We believe as of this post mortgage rates will stay in the 6% - 8% range until a recession forcing the Fed to drop rates, therefore causing mortgage rates to fall as well.
Current mortgage rates shouldn’t stop buyers from entering the market. The difference in mortgage payment between an 6.5% rate and a 5.5% rate = $161/mo ($1,932 yearly). If you’re renting for $1,500/mo you’re wasting $18,000/year. That = a net-savings of over $16,000 buying a home now compared to waiting for rates to drop a full point. $16,000 is a lot of money to waste on renting a home when it could be going into your own home, building equity. If you wait two years, that’s over $32,000; and three years is over $48,000 wasted on renting instead of home equity.
A high IQ buying pro tip isn’t to wait for rates to come down. It’s to get the best rate you can find and get started building equity in your home. If rates drop after you buy, simply refinance into a lower rate. And, unlike buying a home where you have to pay closing costs out-of-pocket, you can roll the closing costs into the new loan when you refinance. If you refinance with the lender you bought the home with, you might get a streamlined refinance that saves time and money. Nevertheless, if the lender you bought the home with is out of business now, simply find a reputable mortgage company who can handle your refinance. People who buy with Bee in 2023 can refi for no broker fee when rates drop, savings them thousands of dollars.
Why Is The Federal Funds Rate Important?
Our entire banking system is based on the federal funds rate, which is the rate at which banks lend money to each other overnight. Overnight lending is when banks lend money to each other through the federal funds market. When banks need to borrow money for a variety of reasons, such as to meet reserve fractional requirements, the interest rate on the loan is called the federal funds rate. Borrowing money from other banks allows the banking system to operate normally, and consumers are usually unaware this occurs. The interest rate on this inter-bank lending directly impacts the rates banks offer to consumers for loans.
How The Fed Fights Inflation
Although we hear a lot about it in the news and few actually know what it is, inflation is something we all understand as consumers. When a loaf of bread costs more money we know inflation is getting worse. When a gallon of milk is cheaper than it was last week, we know inflation is cooling off. Simply put, inflation means you get less for your money. This is a pain everyone feels from the grocery store to the gas pump.
Technically, inflation happens when people spend more (faster) on goods and services than companies can keep up with selling. The only thing our central bank can do to fight inflation is to reduce the money supply going into the economy. They do this by raising rates and making it more expensive to obtain credit, thereby preventing some borrowers from getting it. This reduces the monetary supply in the system and brings prices down. In a fractional reserve banking system, this is the only tool in the Fed’s toolbox to fight the war on inflation.
Conclusion
There are reasons to be happy about the progress the Fed has made taming inflation. And while they still have a ways to go, and could still raise rates even more should the data support the policy position, we are clearly on the right path to stabilizing prices around the dinner table, the drive to work, and buying a home. The primary concern for homebuyers is still the cost of credit, however, making low-rate affordable housing that much more important.
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