Gregory Heym is Chief Economist at Brown Harris Stevens. His weekly series, The Line, covers new developments to the economy, including trends and forecasts. Read on for the latest report and subscribe here to receive The Line in your inbox.
Today, we have nothing but good news to report, so welcome to the "Everything's Coming Up Roses" edition of The Line. Great, now I'm going to have Ethel Merman's voice in my head all day.
Inflation Lower than Expected in October
The consumer price index was unchanged last month, and was 3.2% higher than a year ago. Both those figures were below Wall Street estimates. Here’s what else you need to know about the report:
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A steep decline in energy prices was a major reason why the monthly change was flat, and the annual increase was just 3.2%.
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“Core inflation”—which excludes food and energy prices—rose 0.2% last month, and was 4% higher than a year ago. It’s always concerning when core inflation is running above the headline number, as it typically takes longer to come down. We’ve seen how quickly gas prices can fall in one month—down 5% in October—but core items like shelter do not move that fast. The good news is that the 4% increase in core inflation over the past year is the lowest annual increase since September 2021.
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“Real” earnings—which is basically pay adjusted for inflation—rose 0.2% last month and 0.8% over the past year. That may not sound like much of an increase, but it wasn’t that long ago prices were rising a lot faster than wages.
The better-than-expected data on consumer prices, combined with even better news on producer prices, has markets convinced that the Fed is done raising rates. The S&P 500 jumped 1.9% on Tuesday, which put it up 7.2% for November. Now, that’s a happy stock market!
I know the Fed typically likes to keep the markets happy, but can they really stop raising rates when inflation is still well above their 2% target? Chairman Powell said last week that he was “not confident” enough had been done to bring inflation down. Will the October CPI report change his mind?
Let’s leave those questions for another day, and just enjoy the good news while it lasts.
Mortgage Rates Fall For the Third Straight Week
Put together a weaker-than-expected jobs report, add in lower-than-expected inflation, and what do you get? That’s right, you get lower mortgage rates. The average 30-year mortgage rate fell to 7.44% this week, the third consecutive weekly decline after seven straight increases. Mortgage rates are now 0.35% lower than they were at the end of October.
While it’s true that rates were averaging 6.61% a year ago, you have got to be happy with the recent declines. Sure, we all miss the days of 3% mortgages, but those days have passed and won’t be returning for a long time. In fact, the Jets might win the Super Bowl before that happens again. Rates are moving in the right direction, and that’s all we can hope for right now.
We expect rates to continue to drift lower, as inflation and economic growth keep cooling. For now, lower rates present an opportunity for buyers and sellers. Lower rates mean buyers can get more for their money, and sellers will have more eyes on their listing. Let’s start making deals!
Retail Sales Fall Less Than Expected
That may not seem like news worth celebrating, but it is. Retail sales dipped 0.1% in October, their first monthly decline since March. While that’s not great, it was better than the 0.3% decline economists were expecting.
It’s also important to point out that the retail sales for the past several months had been much higher than expected, so a pullback was inevitable. That said, the toll of high inflation over the past two years, credit card debt at record rates, and the restart of student loan payments don’t bode well for spending in the coming months.
If you add this data to the latest on inflation and jobs, it’s clear the economy and inflation are slowing. The question is “Will the Fed get the soft landing it’s looking for, or will the economy fall into recession next year?” I’ve been wrong on this before, but I’d say it looks like a 50/50 thing at this point.
