Title: A Positive Turn: Low Inflation Spurs Hopes for Rate Hike Pause
In a turn of events greeted with cautious optimism, inflation in the United States has dipped to its lowest in more than two years, standing at a measured 4%. This latest Consumer Price Index (CPI) report, released today, offers compelling evidence that the nation's economy is steadily tracking the path to recovery. This comes just as the Federal Reserve readies to make its next rate hike decision, a topic that has stirred much speculation in the real estate sector and beyond.
The May CPI reading, coming in lower than most analysts predicted, adds fuel to the argument of those within the real estate industry, among others, who have been urging the Federal Reserve to halt its 14-month-long series of rate hikes. They fear that an overcorrection could potentially trigger an adverse impact on the economy. The central bank's decision is expected to be announced tomorrow.
“This is the most closely-watched inflation report in over a year, as the Federal Reserve gears up to meet,” commented Dr. Lisa Sturtevant, Chief Economist of Bright MLS. Despite the inflation rate not reaching the Federal Reserve's 2% target, Dr. Sturtevant believes there could be a chance that the central bank might hold off on a rate increase this month, "if members decide that the outlook for further progress on inflation looks promising."
A notable highlight of this new inflation data is the fact that wage growth has outpaced inflation for the first time in two years. This is a welcome respite for working families. Dr. Lawrence Yun, Chief Economist for the National Association of REALTORS® (NAR), suggested that "low inflation means that the Federal Reserve should stop raising interest rates and possibly slash rates towards the year-end or early next year."
While mortgage rates have seen some moderation since the start of the year, they are climbing again amidst banking unrest and concerns about the pace of inflation deceleration. However, a resilient job market coupled with a relatively rapid housing rebound has led to fears that the Fed might have to resort to stern measures to bring inflation under control.
The CPI report documented increases in shelter, food, and used car costs, indicating that price pressures continue to persist. However, Fed chair Jerome Powell has expressed belief that shelter costs are already decreasing. The core inflation, which excludes the more volatile food and energy costs, remained relatively flat from the previous month, standing at 5.3%.
"Housing is one of the largest components of the Consumer Price Index," explained Dr. Sturtevant. "It also contributes to the CPI with a lag, as changing housing costs are reflected in the inflation data as new leases and home sales activity make their way into the calculations."
As we anticipate the Fed's decision tomorrow, one thing is certain: all eyes will be on the first potential rate pause since January 2022. However, the resilient housing market and recent inflation data could still lead to deliberations on a June rate hike, according to Dr. Sturtevant.
Such a rate hike would likely unsettle investors and possibly maintain mortgage rates at high levels for longer. However, Dr. Yun suggested that underlying economic indicators hint at possible mortgage rate relief in the near future.
"The yield on the 10-year Treasury is responding positively with a rate decline to 3.7%. That normally means the 30-year mortgage rate is around 5.5% to 5.7%. Of course, we know the mortgage rates have been near 7% recently, but the potential for a decline is real as we progress through the year," he concluded.
For more insights into the ever-evolving real estate market and to navigate these interesting times, contact Realtor Kevin Farfan, affiliated with Coldwell Banker Realty.