What Do Inflation Reports Really Tell Us?

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Mortgage rates remained steady this week, ending up at almost the same level as last Friday.

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It's always a big week when the Personal Consumption Expenditure (PCE) inflation report is released, as this is the Fed's favorite indicator of inflation. This report can definitely be a market mover. Fortunately, there were not a lot of fireworks with this report. It came in pretty much as expected, which is always good to have so there is less volatility in rates.

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Inflation is typically the biggest driver of interest rates. When inflation goes up, interest rates go up. When inflation goes down, interest rates go down. The markets anticipate which direction they're going to go, but inflation is key.

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Inflation has come down significantly since it peaked, but it feels like we're just steady, doing really nothing. The declines are stalling out, and they're keeping interest rates at their current level.

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One of the key components of inflation is housing - whether rents are going up or down - because rents make up about 1/3 of the Consumer Price Index (CPI) and about 1/6 of the Personal Consumption Expenditure (PCE).

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These numbers can create a huge swing in what is actually going on. But here's the problem: The government surveys homeowners to get an idea if rents are going up on single-family homes. They ask, "If someone were to rent your home today, how much do you think it would rent for on a monthly basis, unfurnished and without utilities?"

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When they get these calls, most people are guesstimating what their house could rent for. Combine that with the fact that many homeowners think very highly of their own home, these homeowners could be overestimating, increasing what is not actually happening. This method of questioning could be driving up inflation numbers.

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There are many other inflation reports out there, one of which is Truflation. Truflation looks at about 10 million data points versus about 80,000 for the PCE. It is reporting only 3% housing expense inflation versus 6% as reported in the CPI. This disparity in inflation - showing far less inflation than being reported - really skews the numbers.

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That said, the Fed not likely going to change their methodology any time soon. We will likely be stuck with some elevated inflation for the rents and the inflation rate. We're in this for the long run and will likely not see lower rates until the latter part of this year.

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One thing that could change that is the jobs numbers. Those numbers come out next week. They have been showing some weakness, and if they come out lower next week, we may be able to jump back into the 6% range for rates.

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Many times, when interest rates drop, more buyers will jump in to buy homes. It's not necessarily the interest rates that will drive up the prices. It is more the lack of inventory and the number of homes available for sale.

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This means prices are not likely to decline despite the high interest rates, and it will be hard to find a home when rates do go down. There may be a window right now while rates are elevated for homebuyers to purchase!