Are We Nearing the Fed’s 2% Inflation Target?

Market Update

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Unfortunately, mortgage rates jumped back over 7% again. It's possible that this will be the "new normal" for a while.

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This week was the release of inflation data. Both the Consumer Price Index (CPI) and the Producer Price Index (PPI) came out this week.

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The CPI wasn't too bad, but the PPI spooked the market just a little bit. The CPI was impacted by rising gas prices, so we saw rates go up a bit.

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Where do we go from here? The Fed is highly focused on bringing the core inflation rate down to 2%. This is a level that they think promotes a healthy economy with a good balance of moderately rising prices and a good job market.

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Right now, the core inflation rate sits at 3.8%. The core inflation strips out the volatile food and energy sector, and they believe that is the best the best indicator for the market. This is down from a high of 6.6% in September 2022. It's been a nice movement, but still almost double what the Fed wants it to be.

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How long is it going to take to get down to that 2% level? While we have made significant progress, it will likely take months, if not another year, to get down to their target unless the economy actually falls into a recession.

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Why will it take so long to get inflation down? That is difficult to answer, but in general, inflation is calculated by adding up the month-to-month inflation data that comes out.

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The most recent February 2024 result just replaced a February 2023 figure. When inflation was high, it was easy to replace a high figure. Now, as we get closer and closer, inflation is making it more difficult to get lower. It's getting tougher and tougher to make a big dent in lowering the inflation quickly.

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It's not necessarily a bad thing to have this gradual decline in rates. However, the Fed has to be very careful in not putting the consumer in such a bad situation with all these high interest rates that the economy crashes.

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That said, the "new normal" for most of this year will likely be rates in between 6.5% and 7%.

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There is good news: Home values are not likely to skyrocket this year because of the elevated interest rates. That doesn't mean homebuyers should sit on the sidelines. Despite these persistent high rates, home values have not declined.

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Qualified homebuyers just have an extended period of time to jump into the market. They will be happy they did when rates do drop and we see way more buyers entering the marketplace, we have multiple offers, etc.

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Those that buy now will have secured the home price now - not including inflation - and will be able to lower their mortgage payment with a refinance down the road.