Inflation Update – November 14th, 2023

Author:  Joe Maas, CIO SPG Advisors LLC

NOVEMBER 14TH, 2023  

Where is Inflation?

Inflation has made significant strides toward the Federal Reserve’s 2% target in recent months, again confirmed by October’s key CPI data – but home ownership costs remain on the rise.  

Key Highlights

• Annual CPI in October clocked in below estimates at 3.2% & Core CPI at 4.0%.
• The cost of buying the median home has doubled in the last 3 years.
• Inflation will continue to guide the Fed’s actions in raising, holding, or cutting rates.

October’s Cool CPI

Both Headline and Core CPI came in short of expectations Tuesday morning for October, with annual CPI at 3.2% and Core CPI at 4.0%. On a monthly basis, CPI clocked in flat in October, while Core CPI came in at +0.2% from a month ago, both below estimates. Equities rallied on Tuesday following this data, as investors expect that the Fed’s final pause on rate hikes could be a reality.

As we see below, inflation has made significant strides since the height of inflation in 2022 but hasn’t hit the 2% target the Fed has repeatedly reiterated. We still find encouragement that October’s CPI read in at the lowest level (excluding June & July 2023) since spring of 2021, and the higher CPI readings we saw in August and September were heavily skewed by a short-lived spike in energy prices.

Source: BLS

Driving October’s Inflation

In the Month of October

On a monthly basis, the primary drivers of inflation included a notable decline in energy prices, experiencing a decrease of -2.5% MoM across the category. Additionally, the used vehicle category saw a decrease of -0.8%, the fifth month of consecutive declines. On the inflationary side, transportation services showed a significant increase for the month, rising by +0.8% MoM.

While monthly inflation can offer valuable insights, its volatility underscores the importance of considering longer-term trends and annual inflation for a more comprehensive assessment.

From a Year Ago

Looking back from a year ago, food at home exhibited moderate inflation at just 2.1%, while food away from home was up 5.4%. Shelter, the largest factor in CPI, experienced a significant 6.7% rise. On the other hand, energy commodities were down by 6.2% compared to October of 2022, contributing to the overall more modest annual inflation rate of 3.2% in October.

Source: BLS

Rising Shelter Costs

Both rent and home ownership costs have been on the rise since the onset of the pandemic, with mortgage costs skyrocketing in the last year with higher rates. Of the CPI index, shelter costs make up 34.4% of headline inflation, with 73.9% of that shelter category consisting of “owners’ equivalent rent of residence” – essentially what the cost is to rent a comparable home.

As renting becomes a more affordable option in many markets, this “owners’ equivalent measure may become less accurate as higher mortgage rates make the cost to finance a home higher than what the same property could be rented for. The real inflationary pressure in the cost of owning a home may be even higher than the annual 6.7% increase in shelter costs we saw in the October CPI report.

When we extrapolate the cost to buy the median existing home in 2020 versus 2023, the rising cost of shelter becomes even more clear. In 2020, the median price of an existing sold home was $311,800 and the average rate was 2.9% on a 30-year fixed mortgage.

Contrast this with the median price of an existing home in 2023 at $394,300 and the average rate at 7.31%, and the monthly mortgage payment increases by 108.5% in just three years – primarily due to interest rates. Historically, asset prices tend to have an inverse relationship to interest rates, however this has not been the case in recent times, as individuals are sticking with their current, low interest rate mortgages rather than moving, upsizing, or downsizing homes as they may wish to, ultimately limiting supply and keeping home prices elevated.

What’s Next

Although inflation is a backwards-looking indicator, it guides the Fed’s forward-looking decisions. As of November 14th, markets are currently pointing to a 0% probability of a hike in December and just a 5% probability of a final 25-basis point rate hike in January.

From there, markets are pricing in a 60.2% probability of a rate cut by May of next year, however this probability is a quickly moving target that will depend largely on how the economy looks over the next six months – particularly on the fronts of employment and inflation (the Fed’s two Federally mandated goals outside of stable longer term interest rates).

Source: CME Group

When the Fed starts cutting rates, it will either come from a place of victory over inflation or out of necessity to stop the economy from a downturn. In either case, lower rates will probably be the push the residential real estate market needs to get out of its current gridlock, which will also impact future inflation.

We appreciate the ability to monitor economic data, like this key CPI print, and report on our notable findings. As always, we will continue to monitor markets closely and adjust portfolios appropriately per their mandates.

Thank you for your trust.

Joseph M. Maas,
CFA, CFP®, ChFC, CLU®, MSFS, CCIM, CVA, ABAR, CM&AA

The information contained herein is general in nature. It does not take into account your particular investment objectives, financial situation, or needs. It is provided for illustrative or informational purposes only, and should not be construed as advice. Our advisors can meet with you to discuss your retirement plan.