Is Inflation About to Peak?

It’s no secret the housing market has been taking it on the chin this year. The Fed’s aggressive contractionary monetary policy, which is a fancy way to say the Fed is raising rates at the fastest pace in decades to try and curb 40-year highs in inflation, has certainly played a major role. In other words, until inflation stops rising, housing will continue to take a beating.

So is inflation about to peak? If you work in the housing industry, chances are you’re already feeling the effects of higher rates and wondering where things are going. The truth is, none of us truly knows for certain if inflation is about to peak. But the most recent CPI release offered a few clues, which is good news for both buyers and sellers.

TLDR (don’t want to nerd out): CPI came in lower than expected, pushing mortgage rates down from 7.22% to 6.67%. That’s a sizable drop and welcome news if you’re buying or selling a house right now.

Quick Explanation: Inflation and Rates (Ha, nerd! You’re still reading, I knew it.):

If you stayed awake in that college Macroeconomics 101 class you may recall the Fed raises rates when it needs to slow inflation. Housing is extremely rate sensitive, so it’s no surprise the Fed’s aggressive rate hikes have caused pain to General Contractors, Trades, Suppliers, Realtors, Mortgage Lenders, Appraisers, and a host of other professionals in the housing industry.

This year rates jumped from 2.65% in January to over 7% the past few months. Sales have stalled and Builders are reporting contract cancellation rates in the 10-30% range as buyers either no longer qualify or are waiting for rates to ease.

Lagging Data

Last week we got some good news in the CPI data as both CPI and core CPI were below expectations and the YOY growth is declining. Inflation remains at 40-year highs, but it’s finally showing signs of slowing. More good news: Over half of the monthly increase came from the “shelter” category. There is a lag between real-time data and the shelter data reflected in Labor Department data. Most estimates predict shelter data to turn over in the next three months which should contribute to further slowing in the CPI.

Mortgage Rates 

Mortgage rates are tied to the 10-year treasury and this year have priced in a larger than normal spread, which has pushed rates up even further than they should be. Today that spread eased up after the CPI data release as the market believes the Fed may slow their rate increases, or at least see the path to a soft landing.

While the Fed still has more work to do to bring down inflation, today’s CPI signaled we may be closer than many believed. It also provided some validation for the many industry experts who believe inflation will ease quicker than the Fed currently expects, which would be great news.


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(Read on LinkedIn)