Today’s inflation data shows that the peak rate of inflation growth has passed. This should also mean that mortgage rates have hit all-time highs. A key phrase I’ve been emphasizing since writing about the case of his October 27th mortgage rate drop is to think 12 months ahead. Trends are your friend, and the monthly data has cooled noticeably.
That cooling has come despite the largest inflation component, shelter inflation, still rising in the late-modeled CPI data. This means that shelter inflation is not accounted for properly against real-time data.
As you can see below, the monthly readings of the Consumer Price Index show that inflation has peaked.
Without the lagging CPI Shelter Index, the largest component, Headline Core Print, would have been down year-over-year today. It’s positive that most people are taking notes on this reality of shelter inflation.
While still high, year-on-year inflation has declined. Please refer to the following.
All this at a time when the labor market remains very tight. In other words, the Fed doesn’t have to cause unemployment to fall to keep inflation down. The best way to combat inflation is to increase supply. Destroying demand is not the most effective method and will affect future production.
Thursday’s unemployment claims data remained strong, as shown below. 205,000 For headlines, the 4-week moving average is 212,500.
The person who said the unemployment rate needs to be above 6% to keep inflation down feels sick because that advice means millions of Americans have lost their jobs for no reason. It must be.
How have bond markets reacted to this inflation data? It was a mild day compared to November 2022, but as of this writing, 10-year yields are at 3.45%is the third attempt to lower this area.
This means that today’s mortgage rates should improve. Mortgage rates are approaching 5 handles, far away from the 8% to 10% mortgage rates people were talking about late last year when rates peaked. 7.37%.
digging into inflation data
from BLS:
The U.S. Bureau of Labor Statistics reported today that the consumer price index (CPI-U) for all urban consumers fell 0.1% in December on a seasonally adjusted basis after rising 0.1% in November. . Over the last 12 months, the all-commodity index increased by 6.5% on a non-seasonally adjusted basis. The gasoline index contributed significantly to the monthly decrease in all items, more than offsetting the increase in the shelter index. The food index rose by 0.3% over the month, while the home food index rose by 0.2%. The energy index fell 4.5% month-on-month as the gasoline index fell. Other major energy component indices rose in a month.
To understand CPI data, it is important to analyze some internal structures. Of course, the biggest factor in inflation is housing. I stressed that shelter inflation will start in late 2020, but the current reality is the opposite. However, the CPI data lags far behind here.
Thankfully federal reserve understood this and created its own index in December to account for the lag. Back in September, CPI Inflation Day, talked about how this could be a positive story in 2023. I couldn’t have asked for a better result than today’s situation.
Refuge inflation always lags behind. Let’s wait until October 2023 to see when this data line finally peaks and tracks the latest data. When that starts happening, the core CPI drops more noticeably. As you can see from the graph below, the growth rate is still high in the shelter data.
Food inflation growth appears to have peaked.We all know the drama of bird flu egg price, and there is nothing the Fed can do about it. The Fed doesn’t take food inflation into account because it’s part of headline inflation and tends to go up and down.
we all know massive car inflation story After COVID-19, production and chip shortages have significantly accelerated inflation here. But this is also rolling.
The drop in energy is well known, as oil prices have fallen significantly since the Russian invasion of Ukraine soared. Oil is the weapon of war in this modern era, and we have fought back with stockpiles on this front. But what if reserves run low and China returns from her COVID-19 shutdown and starts driving cars again?
No shocking news here, as the Consumer Price Index report is in line with what most people expected. But the bigger story is the trend, and if you’re hoping the Fed will continue to hike rates excessively and send the US into a massive recession, today wasn’t a good day for you.
I saw a discussion on Twitter where an analyst argued that the Fed should raise the Fed funding rate to 7% or 8%. This was hope for the bearish Americans. The Fed may not yet have received the memo that the inflationary scare of the 1970s would not take root in this modern economy without a supply shock at this stage.
As usual, the bond market has outperformed the Fed and the Fed may end up winning it. But for now, interest rates are falling, and similar to inflation fears in the 1970s, fears of 8%-10% mortgage rates in the spring of 2023 are slowly dissipating.
If you want a soft landing, this is the inflation data you want to see. This is even the recession watch I spoke of last year. Good day for the United States and the housing market.
