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Inflation has slowed down, but it may not stop future rate hikes

The Consumer Price Index rose 7.7% in October, the smallest yearly increase since January

Consumer prices continued to rise in October, but at a slower annual pace, suggesting that the Federal Reserve’s interest rate hikes are having an impact on consumer spending habits.

The Consumer Price Index (CPI) rose by 7.7% in October compared to one year ago. That is the smallest 12-month increase since the year ending in January 2022, according to data released Thursday by the Bureau of Labor Statistics.

On a monthly basis, the CPI rose by 0.4% in October, the same as in September. This occurred despite decreases in the indexes for used cars and trucks (down 2.4%), medical care (down 0.5%), apparel (down 0.7%), and airline fares (down 1.1%).

There was also an increase in the index for shelter, which increased by 0.8% month over month. That is the largest monthly increase in that index since August 1990, and it contributed over half of the monthly all items index increase. Other contributors included an increase in the index for food of 0.6% month over month, and an increase in the index for gasoline, which rose 4.0% from September following three consecutive months of declines.

As a whole, the energy index posted a 1.8% monthly increase.

The shelter index rose 6.9% and the energy index rose 17.6% on an annual basis, thanks to the gasoline index posting a 17.5% annual increase and the electricity index posting a 12.1% yearly jump. The fuel oil index also increased by 68.5% on a yearly basis.

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With interest rates now at 14-year highs, the cost of homeownership is becoming an issue for most prospective home buyers. HousingWire recently spoke with CreditXpert’s Mike Darne about how mortgage lenders can leverage credit to help make homeownership more affordable.

Presented by: CreditXpert

Other indexes with notable increases over the last year include medical care (+5.0%), household furnishings and operations (+8.4%), new vehicles (+8.4%), and personal care (+6.4%).

Despite these increases, the rise in the shelter index is largely responsible for the 0.3% monthly jump and 6.3% yearly increase in the all items less food and energy index, according to the BLS.

When broken down geographically, some interesting inflation data trends arise. According to Redfin, the pandemic housing market boomtowns of Phoenix, Atlanta, Miami and Tampa, Florida have some of the highest inflation rates in the country.

In Phoenix, the price of goods and services rose 13% on average year over year, the highest inflation rate among the metros for which the BLS provides inflation data. During the third quarter of 2022, Redfin reports that Phoenix was the sixth-most popular destination for site users looking to move from one metro to another.

Atlanta, which was the 15th most popular destination, had the second-highest inflation rate at 11.7%, while Tampa came in third for inflation (10.9%) and fifth for migration. Miami had the fourth-highest inflation rate at 10.7%, despite being the second most popular migration destination.

In contrast, the places homebuyers are looking to leave, such as San Francisco and New York, had much lower inflation rates, at 5.7% and 5,6%, respectively.

“The pandemic triggered a great rebalancing of affordability,” Taylor Marr, the deputy chief economist at Redfin, said in a statement. “Americans left pricey coastal job centers and moved to more affordable places in the Sun Belt, but now those more affordable places are seeing affordability erode faster than anywhere else in the country. Some of these areas may lose their titles as top migration destinations in 2023 as a result.”

While the slowdown in inflation is positive, experts do not think it will have much of an impact on upcoming Fed action.

“The drop may not be enough to assuage concerns about where the economy—and rates—ultimately are headed. Even as rate hikes begin to slow inflation, the Fed will continue on its path of continued rate increases,” Lisa Sturtevant, the chief economist at Bright MLS, said in a statement. “As a result, we should expect mortgage rates to also stay elevated.”

Looking ahead, Sturtevant says this is not good news for the housing market.

“Higher rates, coupled with the upcoming winter holidays, means housing market activity will basically grind to a halt through the end of the year. High inflation and high mortgage rates are leading to a ‘wait-and-see’ approach among both homebuyers and sellers,” she said. “Those higher mortgage rates have exacerbated the nation’s housing affordability challenge, and affordability remains a major concern among prospective homebuyers. The slowing housing market has not translated into significant price drops, as both demand and supply have receded. As today’s inflation numbers show, the costs of everyday essentials that families buy are still much higher than they were a year ago.”

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