📈Inflation on the rise, will rates ever stabilize? Week of 10.16-10.20.23📈
INFLATION MOVES HIGHER
October 16, 2023
September's Consumer Price Index (CPI) figures unveiled a 0.4% increase in inflation, slightly exceeding expectations. On an annual basis, CPI held steady at 3.7% last month, which is still one of the lowest levels in over two years. Core CPI, excluding volatile food and energy prices, experienced a 0.3% rise, with the annual rate dropping from 4.3% to 4.1%.
This recent inflation uptick was primarily fueled by higher prices in housing, energy, and gasoline sectors. However, the decline in oil prices since September's end might help ease inflationary pressures, unless they surge once more.
Inflation has considerably receded from its peak last year, with the headline rate falling from 9.1% to 3.7% and the core rate from 6.6% to 4.1%.
During their September meeting, the Fed decided not to raise rates, choosing to continue monitoring incoming data related to inflation, the labor market, and broader economic indicators.
Whether the progress in taming inflation is adequate to warrant another pause in rate hikes during their November 1 meeting is still uncertain. The decision hinges on the most recent economic and inflation data and the Fed's evaluation of the overall economic landscape. These factors will be balanced against the Fed's dual mandate of preserving price stability and achieving maximum sustainable employment before a determination is made.
Wholesale Inflation On the Rise:
In September, the Producer Price Index (PPI), an indicator of inflation at the wholesale level, experienced a 0.5% upswing, exceeding expectations. On an annual basis, PPI climbed from 2% to 2.2%, although it's worth noting that there was a significant revision in the previous report, which pushed the annual figure from 1.6% to 2%.
The Core PPI, which excludes the volatile food and energy prices, also showed a 0.3% increase, with the year-over-year reading stepping up from 2.5% to 2.7%. Prior data received a notable revision, raising the annual figure from 2.2% to 2.5%.
While the annual PPI has been on an upward trajectory, it still remains significantly lower than the peak of 11.7% seen last year. Notably, a substantial portion of the wholesale inflation increase can be attributed to the recent surge in energy prices, which escalated by 3.3% last month following a 10.3% rise in August.
This surge in energy prices is exemplified by gasoline and fuel oil prices, which rose by 12.9% and 18.4% over the last two months.
The good news: The primary component of the Consumer Price Index (CPI), known as Shelter, has experienced its sixth consecutive monthly decline, dropping to 7.2%. Specifically, listed rents have seen a 1.2% decrease over the past year, and it is anticipated that this decline will persist in the months ahead. This trend is likely to contribute to an ongoing decrease in core inflation, aligning with the Federal Reserve's objectives.
FED TALK
Recent discussions within the Federal Reserve have unveiled differing viewpoints among its members. Fed Governor Michelle Bowman has expressed concerns about heightened inflation and indicated a potential need for "further rate increases, maintaining a restrictive stance for an extended period."
However, a counterbalancing perspective has emerged from several other Fed officials who appear open to scaling back rate hikes. Fed Governor Christopher Waller has noted that financial markets are already tightening, relieving some pressure on the Fed. He also acknowledged the improved inflation data and suggested a return to the Fed's target.
Atlanta Fed President Raphael Bostic shares this view, asserting that additional rate hikes may not be essential and highlighting the restrictive impact of current rates on the economy. San Francisco Fed President Mary Daly has even suggested that the necessity for more rate hikes could decrease if financial conditions remain stringent. These positions align with statements from Dallas Fed President Lorie Logan and Philadelphia Fed President Patrick Harker.
Why is this important?
The financial markets are highly responsive to the statements made by Federal Reserve members, especially in the lead-up to the next Fed meeting, which is just two weeks away. This week, 17 members of the Fed are scheduled to speak publicly, including Fed Chair Jerome Powell. These public remarks provide important insights into whether the Fed members are leaning towards another rate hike or opting to keep rates unchanged.
Currently, market sentiment suggests that the upcoming decision by the Federal Reserve may not involve a rate hike but, instead, a potential rate cut. This expected rate reduction is anticipated for June 2024. However, it's crucial to recognize that economic conditions can evolve significantly between now and that projected date. Presently, the primary focus of the Fed remains on managing and curbing inflation, with a strong commitment to maintaining higher interest rates for an extended period to bring inflation back to the target rate of 2%.
WHERE ARE HOME PRICES HEADED?
Zillow's recent report indicates a slight decline in home values by 0.1% in September, marking the first monthly drop since February. Nevertheless, compared to September of the previous year, home prices are still 2.1% higher. Zillow's index suggests that home values are on track to increase by 6% for the entire year.
This minor dip in September comes after significant price surges observed during the spring and summer, including a 1.3% rise in April, May, and June, and a 0.7% increase in July. The fall season traditionally witnesses reduced competition in the housing market, particularly among families with school-age children who prefer to settle before the new school year. Consequently, this season tends to be the least robust in terms of home price appreciation.
Additionally, Fannie Mae anticipates that U.S. home prices, measured by the Fannie Mae HPI, will increase by 6.7% in 2023 and further rise by 2.3% in 2024.
RECESSION
While a recession can lead to lower mortgage rates due to economic uncertainties, it doesn't necessarily guarantee a decrease in home prices. It's important to note that predictions and assessments about the possibility of a recession vary among different experts and sources.
Bloomberg, in particular, anticipates a forthcoming recession and criticizes mainstream economists for their past inaccuracies in predicting economic downturns. According to Bloomberg, there are several indicators and signals that suggest a recession may be looming on the horizon.
These signs include:
1. Historical Patterns: Throughout history, optimism about a "soft landing" for the economy has often occurred just before severe economic downturns.
2. Challenges in Forecasting: Economists find it challenging to predict recessions because they typically use linear forecasting models, while recessions are non-linear events.
3. Delayed Effects of Rate Hikes: The full impact of recent interest rate hikes by the Federal Reserve may not be felt until later, potentially affecting the economy negatively.
4. Recession Indicators: Certain economic indicators, such as unemployment, are already showing signs of potential economic trouble.
5. External Shocks: Various factors, including an auto strike, resumption of student loan payments, rising oil prices, high Treasury yields, a global economic slowdown, and a government shutdown, are additional threats that could harm the economy.
6. Consumer Spending: Despite strong consumer spending, savings have been depleted, and some signs, like rising credit card delinquencies, suggest challenges ahead.
The likelihood of a recession is a complex issue with multiple factors at play. While there are arguments for different potential outcomes, including factors like increased productivity, government policies, and business investments, there are also significant challenges and risks to consider.
One potential risk to economic stability is increased government spending on new conflicts or wars, which could strain the economy. However, these potential challenges should be viewed in conjunction with other indicators that suggest a heightened risk of a recession.
One notable concern is the assessment by the International Monetary Fund (IMF) that U.S. debt levels are unsustainable. High levels of debt can put pressure on an economy and raise concerns about long-term fiscal sustainability. Therefore, a cautious approach is warranted, taking into account the cumulative impact of these various economic challenges.
