Market Update: Rates Surprisingly Inch Higher Despite Friendly Inflation News; What’s the Deal?

Blog posted On August 14, 2023

Last week, rates trended higher despite some friendly inflation news from the consumer price index (CPI). Though it’s not always the case, higher inflation levels have correlated to higher rates over the past year. But there was some hopeful news for rates and housing last week as well. Let’s break it down.

Why rates trended higher after last week’s inflation news

Inflation was largely lower than expected last week. So why did rates trend higher? There’s no one singular reason why rates trended higher. But are a few culprits that might have contributed to the climb:

1. The markets may be predicting higher inflation numbers next month

There were some costs that weren’t included in July’s CPI that many fear will be accounted for in August’s report and consequently push those inflation numbers higher: Oil increased 16% and gas increased 8%

2. Some comments from a Fed member may have spooked the markets

Mary Daly, San Francisco Fed President, reacted to the inflation numbers by saying the Fed “has more work to do.” This might have led the markets to believe the Fed is misinterpreting the inflation data and not accounting for the lag of shelter costs. If the Fed misinterprets the data it could raise rates again.

3. Another possible reason is that the Fed’s ‘soft landing’ is working

This essentially means that their goal has been to bring inflation down (by raising the benchmark interest rate) without causing economic distress (which would have caused lower rates sooner)

How the inflation report might signal hope for rates and housing

Earlier last week, the Federal Reserve of San Francisco released a report titled, “Where is Shelter Inflation Headed?”  In the report, there were a few key details that shed some light on inflation, rates, and shelter costs that could offer you some hope in the current market.

• “House prices and asking rents slowed sharply in 2023 after a period of extraordinary growth starting in early 2020.”
• “However, measures of shelter inflation that are tracked as part of the consumer price index (CPI) have continued to grow, even as some other components of overall inflation have cooled.”
• “Whether shelter inflation remains high will strongly influence the path of future overall inflation because shelter makes up about 30% of the CPI consumption basket.”
• “Our results suggest that the recent slowdown in asking rents and house prices is likely to slow shelter inflation significantly in the future, although substantial uncertainty surrounds these forecasts.”
• “Our baseline forecast suggests that year-over-year shelter inflation will continue to slow through late 2024 and may even turn negative by mid-2024. This would represent a sharp turnaround in shelter inflation, with important implications for the behavior of overall inflation.”

As always, let us know if you have any questions!

Sources: Bloomberg, Federal Reserve of San Francisco, Mortgage News Daily, Mortgage News Daily