Inflation Eases in April; Good News for Potential Fed Rate Cut

The Consumer Price Index (CPI) increased 0.3% in April on a seasonally adjusted basis, after rising 0.4% in March, the U.S. Bureau of Labor Statistics reported on May 15. Over the last 12 months, the all-items index increased 3.4% before seasonal adjustment.

After hitting a 40-year high of 9.1% in June 2022, inflation has slowed. But after much progress in the fall, price increases have become more volatile.

The slight decline is positive for a potential Federal Reserve rate cut, which would mean mortgage rates would likely be lower as well.

Bright MLS Chief Economist Dr. Lisa Sturtevant painted a less-than-rosy picture of the numbers.

“We’ve been saying for a long time now that inflation is remaining stubbornly elevated, and this report—along with data from the Survey of Consumer Expectations—provides additional evidence that consumers are increasingly pessimistic that inflation is coming down soon,” she said.

“While consumers are facing higher prices at the pump, high housing costs also continue to be a main driver of the overall inflation numbers. The shelter component of the CPI has come down since its 2023 peak, with shelter inflation coming in at 5.5% in April. But unfortunately, there is evidence that rents are going to be on the rise in the second half of this year. 

“Record levels of new apartment construction in some markets in 2023 started bringing rents down. However, the number of permits issued for the construction of new multifamily buildings has declined, and deliveries of new apartments will slow in 2024. That slowdown in new supply will increase pressure on rents. 

“Home prices do not enter directly into the Consumer Price Index calculation; rather, the owners’ equivalent rent measure tends to closely track the rent index. Prospective homebuyers in the market in 2024 likely will see home price growth moderating as more supply comes onto the market. However, some buyers will be pulling back amidst elevated mortgage rates and persistent inflation. 

“The housing story is important because it demonstrates the fundamentals of supply and demand—when there is more supply in the market, prices tend to moderate. The solution to high housing costs is more supply.” 

The all-items index rose 3.4% for the 12 months ending April, a smaller increase than the 3.5% increase for the 12 months ending March. The all items less food and energy index rose 3.6% over the last 12 months. The energy index increased 2.6% for the 12 months ending April. The food index increased 2.2% over the last year.

The index for shelter rose in April, as did the index for gasoline. Combined, these two indexes contributed over 70% of the monthly increase in the index for all items. The energy index rose 1.1% over the month. The food index was unchanged in April. The food at home index declined 0.2%, while the food away from home index rose 0.3% over the month.

The index for all items less food and energy rose 0.3% in April, after rising 0.4% in each of the three preceding months. Indexes which increased in April include shelter, motor vehicle insurance, medical care, apparel and personal care. The indexes for used cars and trucks, household furnishings and operations, and new vehicles were among those that decreased over the month. Chief Economist Danielle Hale had this to say.

“Although the labor market cooled in April, today’s CPI data likely holds more sway over the economic and policy outlook, and therefore the trend in interest rates, including mortgage rates. In recent months, annual inflation has picked up as the monthly pace of price growth accelerated. Today’s release showed that the monthly price index for all items rose 0.3%, enough to cause the annual inflation rate to drop to 3.4% from 3.5% last month. Today’s data was a tiny step in the right direction and will likely provide some stability in rates at the current level and may even lead to some additional declines.”

Melissa Cohn, regional vice president of William Raveis Mortgage, had a positive take and feels that whether the numbers show inflation abating or stubbornly sticking around, they could be a “market mover” for the real estate sector.

“This is great news for the real estate market as mortgage rates are dropping following the release of the CPI report,” she said. “It will be interesting to hear what the three Fed members have to say about rates when they speak. This one report is not enough evidence of cooling inflation for a rate cut but it’s a good head start. If the June report is muted as well, maybe we can look for a rate cut in July instead of September.

“People seem to think that the CPI numbers and inflation data this week mean we’re going to see mortgage rates move by probably a quarter percent one way or the other,” she continued. “So far this year, we haven’t seen the rate of inflation drop at all, and that’s kept mortgage rates higher.”

Accordingly, depending on how good or bad the CPI numbers are, Cohn anticipates some movement in the rates. For Fed-watchers, she believes the chances for a rate cut remain slim, with perhaps the best chance in September—but, given that it’s an election year, and there are many other things going on, it’s really difficult to get a sense of what happens next.

As such, focusing on the CPI may help provide a sense of what comes next for the Fed and for real estate at large. “There’s a whole lot that’s going to happen between now and September,” she said. “Because of where we are in terms of the data, the fact that it’s an election year, we have two wars going on in this world, it’s hard to make any long-term predictions.”

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