Inflation Rose for a Second Straight Month — What That Means for Mortgage Rates

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An inflation report, six days before the Fed meets

Welcome to Mortgage Mom Radio. I am Debbie Marcoux, I am the Mortgage Mom, and we have a lot going on in the field of finance today. An inflation report came out this morning, ahead of next week's Federal Reserve meeting where they will decide whether to increase interest rates again — and by how much, if they do. What does that inflation report mean to us? How will it affect us? Should we expect mortgage rates to keep going up depending on what the Fed does? We're going to talk about all of that today.

This is an interactive show, so please put your questions in. I'll read them out loud and answer them. The very best shows I have are the ones where I get to answer your questions, because if you have that question, there's a very good chance somebody else has that exact same question.

When the Fed meets, and what's expected

Let me start with an article from Investopedia — I want to give credit where it's due, I'm not trying to take anyone's information, I'm referencing things that are important to understand. It's called “Next Fed Meeting: When It Is in September and What to Expect.”

The next Federal Open Market Committee meeting will be held September 19th and 20th, 2023. The FOMC is the monetary policy making body of the Federal Reserve system, and it holds eight regularly scheduled meetings during the year, plus others when necessary. So by next Wednesday, by the time I get on at 1 p.m. Pacific, we will know whether the Fed has increased rates by another quarter point, a half point, or decided to hold steady.

Market expectations for the September meeting are mixed. Some analysts believe the Fed will continue hiking after a hawkish pause in June, saying that even though inflation has moderated it remains a concern. Others think the Fed may put things on hold and see the state of the economy, given the risks of bank failures, a tepid stock market, and global economic instability. Overall the consensus is that the Fed will impose one additional 25 basis point — a quarter point — rate hike before the end of the year. However, the Fed chair has said no decisions about the future have been made and the Fed will take it meeting by meeting.

That leaves everybody hanging, right? It doesn't really give you an understanding of what's driving those decisions, or what the increases mean for you. So let's dig in.

Inflation rose for a second straight month

Here's the big thing today. The general overview is that inflation increased from July to August — and remember, July inflation had already increased from June. So we're going in the wrong direction right now, which puts a lot of pressure on the Fed next week.

I'm going to read from the USA Today article that came out today, September 13, 2023, in their economy section: “Inflation rises for second straight month in August on higher gas costs.”

The first thing that came to mind when I saw that was driving down the street about a week before the Labor Day weekend, looking at gas prices, and saying to my son, “Wow, prices are really up on gas.” In my head I wasn't too surprised — holiday weekend. But as I kept reading, it wasn't just the holiday. There are things going on with OPEC.

The article says inflation accelerated a second month in August on a spike in gasoline prices, and an underlying measure of household expenses rose more than anticipated, highlighting that the Federal Reserve's battle to tame consumer prices may not be over. Goods such as used cars and furniture kept drifting down in price, partly offsetting a climb in rent, travel and other services.

Consumer prices overall rose 3.7% from a year earlier, up from 3.2% in July, according to the Labor Department's Consumer Price Index. That's the second straight bump after twelve consecutive declines in annual inflation. We were all starting to get excited — we were seeing inflation come down, seeing the light at the end of the tunnel. And here we are, second month in a row going up.

On a monthly basis prices increased 0.6%. That followed a 0.2% rise in July and marked the biggest jump in more than a year. The chief culprit was a surge in gas costs.

What core inflation is

Core inflation is another term you're going to hear people throw around. Inflation is inflation, right? So what's core inflation?

Core prices exclude volatile food and energy items, and the Fed watches those more closely. Core prices are still elevated and rose 0.3% — economists expected a repeat of the prior month's 0.2% advance. But the rise still moderated the annual increase to 4.3%, down from 4.7% in July, and the smallest gain since September 2021.

As Jason Schenker, president of Prestige Economics, put it in the article: the inflation genie is not yet back in the bottle. It's not over yet. We're going the wrong direction and they've got to curb it.

Some things are getting better. We are seeing prices on food come down at the grocery store — eggs hit that crazy place where you had to take out a loan to buy a carton, and they've come down a bit, settling a little higher than pre-pandemic but coming down. I've read quite a few articles saying rent is starting to cool as well. Rental prices went up 7.9% over the past year, and they're starting to see that come down and cool off. A lot of the push in the current report is really from gas.

Why the last stretch is the hard part

Annual inflation has slowed notably after hitting a 40-year high of 9.1% in June 2022, but lowering it the rest of the way to the Fed's 2% target is expected to pose a thornier challenge. Goods prices have fallen as pandemic-related supply chain bottlenecks dissipated, but the cost of services — car repairs, recreation — has leaped, chiefly because of increasing employee wages.

So it's getting really expensive to go on vacation, and we're all choosing to do staycations. Gas is expensive, so flights get more expensive. We're going to see sectors take a major hit because people aren't going to do those things. Hopefully that starts bringing inflation back down.

Will the Fed hike in September?

Here's what USA Today reported today. Barclays expects the Fed to raise its key interest rate once more this year, by a quarter percentage point, after lifting it by five and a quarter points over the last 16 months — the most aggressive inflation-fighting campaign in four decades.

Nationwide's chief economist said today's report isn't enough to convince the Fed to veer from its plan to hold rates steady at next week's meeting, but it could help persuade officials to hike again in November, depending on how inflation and the job market evolve.

Others say the Fed is done. Forecasters at Pantheon Macroeconomics and Capital Economics believe softer rent increases and a slowing economy and job market in the coming months will lead the Fed to stand pat the rest of the year.

Consumers, meanwhile, are still struggling with high prices. Although wage growth recently started outpacing inflation, many Americans say they aren't feeling the benefits.

So nobody's going to answer our question. We have to wait and see what they do next Wednesday. But this gives you a good idea of what they're looking at in the financial markets when they decide.

Social Security's 2024 cost-of-living adjustment

I want to bring this one up because it might give some people a little relief. If you're on Social Security, COLA is the cost-of-living adjustment.

Social Security recipients can expect their cost-of-living adjustment to jump 3.2% next year, according to a new forecast made in the wake of today's report — up from the previous estimate of 3.0%. So when you get that award letter at the end of this year telling you what your payments will be in 2024, expect roughly that.

While inflation has ticked up each of the last two months and is higher than the Fed's 2% target, the rate of price increases has generally been dipping over the last year, which is why the benefits adjustment is slight. Still, 3.2% would be higher than the 2.6% average seen over the past two decades, though much lower than the four-decade-high 8.7% adjustment this year. As a seniors' policy analyst quoted in the piece put it, the harsh reality is that the amount COLA increases benefits in most years is meager at best.

Is a recession still coming?

There's a good chance not — but the odds are greater in some parts of the country than others. The likelihood of the U.S. experiencing a recession by the middle of next year has significantly lessened recently, as economic and job growth have remained strong and inflation has eased. Some regions are more vulnerable to a downturn than others.

I've talked about that on previous shows. It really does depend on what pocket of the country you live in. For a minute there, a lot of people migrated to Texas — from California and from many other states. Then part of that labor force that had been approved to work remotely started getting called back to the office, and some people got over country living once things were back in action and that drive into town started to matter again. For a small minute we saw some Texas cities start to see prices decline. That seems to have begun reversing.

But the majority of analysts out there right now are saying we're not seeing signs of a recession. Could one happen? Sure. Could something happen tomorrow that we don't foresee — something like a pandemic — that changes or reverses the trajectory? Absolutely. But at the end of the day, it's not looking like we're going to see that recession.

Debbie's own timeline

This is a mortgage and real estate show. We can't wait for interest rates to come back down. I said on a show about six or seven weeks ago that I felt we had about 12 to 18 months — my guess as the Mortgage Mom was about 16 months. That was a month and a half ago, so let's call it a flat 15 months. I personally think that in about 15 months, which would be the end of 2024, we start seeing things in much better shape, with rates coming down to a much more appropriate level.

Which, by the way — interest rates where they are today are actually still lower than the national average over the last 40 years. I read that in an article earlier today. But we've all gotten used to a certain interest rate, and we all like the monthly payment at the lower rate. It makes housing a lot more affordable when rates come down.

It really will happen, I promise. The question is how long it stays high, and that's determined by how long it takes to get inflation back down. And when we're going the opposite direction, folks, it's not good.

What the mortgage industry expects

This next piece is from The Mortgage Reports, also published today, September 13th. It's a website I go to frequently and get a lot of data from, and I want to give them the credit.

The Federal Reserve will hold its next Open Market Committee meeting on September 19th and 20th, and with it comes the question of another rate hike. The annualized inflation rate hovers around 3%, but the central bank wants it settled near 2% in the long term. Despite the gradual decrease, inflation has proved stickier than expected.

At the previous meeting the Fed decided to raise rates and said it would adjust its policies as necessary. As the president of the Dallas Federal Reserve Bank, Lorie Logan, put it: while it's impossible to know how many more hikes are in store for 2023, there is work left to do — “I'm not yet convinced that we've extinguished excess inflation.”

The national inflation rate declined for twelve straight months, from June 2022's 41-year high of 9.1% to 3.0% in June 2023, before inching up to 3.2% in July, according to the Bureau of Labor Statistics. During that time the Fed adjusted its tightening: the funds rate went from hikes of 50 and 75 basis points — a half point and three quarters of a point — down to 25 basis points in February, March, May and July, while it skipped a hike altogether in June.

Their call: while the Fed could always change course, many experts anticipate the FOMC won't hike at its September meeting. So The Mortgage Reports thinks they hold steady. USA Today is pretty sure they'll increase. You get to make that call — we should all put some money on it and see what happens.

Interest rates trended up through the first eight months of 2023, with the average 30-year fixed rate mortgage ranging from 6.09% to 7.23%, according to Freddie Mac. Although the annualized pace of inflation is falling, it's still above the Fed's goal, so more hikes and tightening could continue until inflation is brought down to a normalized level. Rates are notoriously difficult to predict, but typically rise in response to Fed tightening.

What the Fed rate actually controls

Here's the piece I've said numerous times on this show: mortgage rates are not directly connected to the Federal Reserve prime rate.

There are things that are directly connected. Your credit cards — you've probably seen minimum monthly payments go up even though your balance hasn't increased. Even if you haven't spent a single dollar and you're struggling to make the minimum on the balance you've got, that minimum has gone up from where it was a year ago. Pull an old statement, or log in and compare your minimum payment in July of 2022 to July of 2023. Your credit cards feel it. Home equity lines of credit, directly connected. Short-term loans, directly connected — if you've financed a new car recently, you've seen rates significantly higher than pre-pandemic and even pandemic times.

Mortgage rates are not directly connected. Mortgage rates are more like the stock market. It depends on what somebody comes out and says, what big news happened, what triggers a sell-off, what triggers buying. That's what determines where mortgage rates go.

The Mortgage Reports puts it well: the Federal Reserve doesn't determine mortgage rates — instead, rates are intrinsically tied to the Fed's actions. The Fed funds rate is the amount banks pay to borrow money from each other overnight, and an increase signals higher inflation and economic expansion. Mortgage rates typically rise in response to growth in the Fed funds rate.

How mortgage rates actually reacted to the last three meetings

How mortgage rates respond in the immediate aftermath of Fed meetings has been a mixed bag over the last year. Most recently, they rose three basis points — 0.03% — the day following July's 25 basis point hike. They declined four basis points, 0.04%, after May's 25-point hike. And they inched down two basis points, 0.02%, following June's paused hike.

Think about what that does to your assumptions. They pause, and in your head people jump off the sidelines because things are getting better, so rates should come down — and we saw a very, very minimal change. They hike a quarter point in May and July and in your head you're thinking, I was getting pre-approved and told the rate would be 7%, now I'm looking at 7.25% — and it moved two, three, four hundredths of a percent.

Everything with mortgage rates is based on anticipation. It's based on what's being talked about, and where people are putting their money. Are investors buying mortgage-backed securities? Is the government buying them, or selling them off? Does someone want a solid, safe investment and put money into treasuries and bonds? Or is the stock market on fire, and they want something aggressive, so they're pulling money out of the safe bets? Mortgage rates aren't directly tied to the Fed, but we obviously feel what happens — the banks are getting the money at a certain level, and if they're being charged more, they turn around and charge you more. It all correlates. It just isn't directly connected.

Advice for buyers on the sidelines

If you've thought about purchasing a home, you've been sitting on the sidelines, you were waiting for the crash, waiting for property values to drop, waiting for interest rates to come down — all you've done is watch property values increase and rates go higher, and everything get less affordable.

Here's what The Mortgage Reports says, and this isn't coming from the Mortgage Mom, even though I've said it a thousand times: bringing and keeping inflation down continues to prove difficult, and mortgage rates remain high. While rates could grow at any point, they're still below average historically. Even if you missed out on the rock-bottom rates of the last couple of years, you can always refinance once they eventually hit a down cycle. It's also important to note that many people build wealth through home equity.

And I can tell you right now: when mortgage rates do start coming down, we will see more inventory, we will see more sellers willing to sell and buy again — and with that inventory is going to come a frenzy of people looking. It's going to be very difficult to get into a property. Multiple offers. Overbidding. You've seen it in the past, so I'm not lying about what can happen.

There are so many people sitting on the fence right now who aren't pulling the trigger because they're waiting for rates to come down. You are one of millions and millions of people with that same mindset. When rates do come back down it is going to be a frenzy, and prices will not have come down — they'll escalate, and escalate faster once you've got that many people out on the street looking. So if you're ready to buy a house, get off the fence, get yourself pre-approved, and start looking.

What you can do as a consumer

I promised we'd talk about what you can do to help curb inflation, because we all need to work together to get it down — it helps your credit cards, your home equity line, your car loan, your student loans, your mortgage, just about everything you use to live your life.

The job market is strong. Unemployment is low. We're seeing pay increases to keep up with cost of living. Inflation was out of control in 2022, so many of you got pinched, and you're probably still feeling it, because it takes time to make up what you lost during the crazy high gas prices, crazy high utility costs, crazy high groceries. It was nuts in the second half of 2022 and even early 2023.

So what can you do? Save. Stop the excess spending. Fewer restaurant meals, fewer expensive vacations, fewer airline tickets, fewer cross-country road trips burning an absurd amount of fuel. Anything you can do to put money in the bank.

Christmas is coming — I know it's crazy to bring that up, but it's already September. Walk into a store today and you'll see pumpkins, in two weeks Thanksgiving, and probably within three weeks you'll start seeing Christmas ornaments. Make it a cheaper Christmas. If they see employment is good and people are getting pay increases, they're going to project a strong holiday buying season. We need those projections to come out differently than they expect. So if there's a brand-new pair of shoes you want, a hat you need, a jacket you've got to have, a game console your kids want — that's where we can all buckle down.

That's the only real recommendation I can give as a consumer — and I should say recommendation, not advice, because I am not a financial advisor. But cut down how many times you go out to eat during the week. Cut down the runs to Starbucks. Cut down on vacations. Slow your spending down.

Wrap-up

So let's see what happens next Wednesday, September 20th. I'll be here, and we'll have an announcement about 30 minutes before I come on live — did they raise it, did they not, and if they raised it, by how much.

If you want to know when I go live, text the word LIVE to 844-935-3634 — that's 844-WE-LEND-4. One text a week with the topic and a link to join, no spam and no other calls. That's also the office number if you'd like to talk to me or one of the girls and dig in deeper on home buying, refinancing, or whatever kind of financing you need. And you can always go to mortgagemomradio.com. Have a fabulous rest of your week — I'll be back here in seven days, right around 1 p.m. Pacific. Talk to y'all real soon.