When Will Inflation Go Down? | Impact on Today’s Housing Market

Many people are asking, “when will inflation go down?” Because it really hit the average American household hard over the past year – a trend that will likely continue in the year ahead. However, it has been trending lower each month, edging closer to the Federal Reserve’s two percent target.

Inflation in 2022 hit its highest rate since the 1980s as the U.S. economy recovered from the COVID-19 global pandemic, but has since slipped. Here we take a look at inflation, what it means for the average American and when experts believe inflation will go down to the Fed’s target range.

Inflation Rate in January

Inflation rose by 3.1% annually in January, according to the latest Consumer Price Index (CPI) report from the Bureau of Labor Statistics (BLS). This was down slightly from December’s annual increase, but remains higher than the target 2% rate. Inflation peaked in June 2022 when it hit 9.1% annually, according to BLS.

Overall, the inflation rate has been declining, but the BLS report shows consumer prices did rise more than anticipated.

Signs are still good that inflation levels are heading in the right direction. Inflation was up on an annual basis by 3.1%, and rose slightly by 0.3% for the month. Housing costs make up a majority of the increase. The shelter component of the CPI was the largest contributor, with shelter inflation up 6% on an annual basis. Food prices also rose, while the cost of cars decreased, largely because of declining gas prices.

As inflation remains high, housing costs make up the majority of the increase, the cost of cars and even the price of food contributing to rise. Many Americans find themselves spending significantly more on basic necessities.The high inflation levels could also push interest rates higher for credit cards, student loans and mortgages, meaning Americans could continue to spend more.

Inflation rose slightly in January by 0.3% over December’s rate monthly gain. However, year over year it has slowed with December’s annual gain of 3.4% and 3.1% year over year for January.

The Federal Reserve is Trying to Lower Inflation

Although inflation is higher than the Federal Reserve’s target, the U.S. government has certain monetary policy tools that it can use to try to control or influence the direction of the inflation rate.

For example, the Federal Reserve can raise or lower the federal funds rate, which is the rate at which banks borrow money. As the federal funds rate rises, banks pass these increased costs on to consumers by raising interest rates on mortgages, student loans, personal loans, credit cards and other lending products. This then slows the rate of lending and the economy.

At its most recent meeting in January, the Fed paused its interest rate hikes for the fourth consecutive time, leaving the target range for the federal funds rate to 5.25% to 5.50%.

Inflation is decelerating, and the Fed continued to hold rates steady.

“Don’t expect the Fed to stop raising rates,” Morning Consult Chief Economist John Leer said after the Fed’s July meeting. “The Fed cares primarily about the trend in core PCE inflation, which has been persistently elevated for the past six months. One month of encouraging CPI data isn’t enough for the Fed to make a dovish pivot, particularly as it seeks to maintain credibility with financial markets.”

Will Interest Rates Go Up or Down for the Remainder of 2024?

With the Fed’s actions and economic trends, most economists expect that the U.S. is headed slowly in the right direction and expect better growth in 2024. The real gross domestic product (GDP) rose by 2.5% in 2023.

According to Fannie Mae’s Economic and Strategic Research Group’s January press release, Fannie Mae “project[s] a slowdown in economic growth in 2024; however, it now anticipates a brighter economic backdrop compared to previous months, having replaced its call for a modest recession with positive-but-below-trend growth in 2024.

Inflation did tick back up again in January, but overall inflation pressures are easing, nonetheless. Economists still largely see the report as encouraging in the Fed’s fight against inflation.

How Does High Inflation Impact Housing?

Inflation can impact the housing market in several ways. Perhaps most notably, as the Federal Reserve continues to raise rates, it pushes mortgage rates higher.

The average 30-year fixed-rate mortgage rose slightly to 6.77%, according to the latest data from Freddie Mac. This comes following the news of the rise in the CPI. This is roughly the same as the average rate last year, which was 6.81%.

In December, the Fed said it expected three rate cuts this year. Following its January meeting, Chairman Powell clarified these cuts would probably come later in the year as the Fed is looking for “more good data” showing inflation is heading toward the 2% goal.

Fannie Mae’s ESR group forecasts that overall home sales will begin to recover in 2024. While issues in affordability and supply will remain, the ESR group expects “the start of a recovery in existing home sales will likely occur, along with moderating home price growth and a more stable level of new home construction.”

This month’s BLS report on the CPI tempered expectations a bit.

“On the heels of consumer prices rising more than expected, mortgage rates increased this week,” said Sam Khater, Freddie Mac’s chief economist. “The economy has been performing well so far this year and rates may stay higher for longer, potentially slowing the spring home buying season,” said Khater.

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