Last Updated on August 21, 2023 by Luke Feldbrugge
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 lower this year. 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 July
Inflation rose by 3% annually in June, according to the latest Consumer Price Index (CPI) report from the Bureau of Labor Statistics (BLS). This was down slightly from previous months but remains higher than the target 2% rate. Inflation peaked last year in June when it hit 9.1% annually, according to BLS.
Since then, the inflation rate has decreased each month. This declining trend in inflation levels is expected to continue in the months to come. But while inflation was down on an annual basis, it actually rose slightly by 0.2% for the month. 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.
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.
Last year, the Fed raised rates seven times in order to combat inflation levels. At its most recent meeting in July, the Fed paused its interest rate hikes, leaving the target range for the federal funds rate to 5.25% to 5.50%.
Although inflation is dropping, economists say a broader look at the economy confirms the Fed will likely continue raising rates in the months ahead.
“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 2023?
Many economists continue to expect that the U.S. is headed toward a soft recession. But the gross domestic product (GDP) rose by 2.4% in the second quarter 2023, an increase from the first quarter when GDP rose 2%. But some economists have predicted a recession could come later year year, or early next year, and a recession could help slow rising inflation rates.
According to Fannie Mae’s Economic and Strategic Research Group’s July 2023 commentary.
“While noting that the probability of a ‘soft landing’ may have increased of late, [we] expect a modest recession beginning in the fourth quarter of 2023 or the first quarter of 2024,” Fannie Mae stated in its latest forecast.
Inflation, as measured by the Consumer Price Index, decelerated again in June, and Fannie Mae expects the Federal Reserve to closely monitor wage growth metrics to help it decide if it will continue raising interest rates, according to Fannie Mae.
However, inflation did tick back up again in July, with one economist stating she felt overall inflation pressures are easing, nonetheless. Other economists agree the report is still 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.
At the beginning of August, the average 30-year fixed-rate mortgage rose slightly to just below 7%, according to the latest data from Freddie Mac. This is significantly higher than the average rate last year, which hovered below the 3% mark. As mortgage interest rates rise, housing payments become less affordable for new homes or to refinance as monthly payments move higher. This could cause more homebuyers to look for smaller homes or avoid buying a home altogether as they await a more favorable interest rate environment.
Fannie Mae’s ESR group forecasted that total home sales could decrease by 13.3% in 2023 before rebounding next year. And a combination of high mortgage rates and low levels of housing inventory could exacerbate the risk of recession.
“We began discussing our expectations of a supply shortage in late 2014, and it remains front and center in the housing market in 2023,” said Doug Duncan, Fannie Mae senior vice president and chief economist. “The supply of existing homes is near the 2009 crisis low, and it’s showing no signs of easing. This puts the onus on homebuilders and can be seen in the construction data. There is uncertainty about the real financial capability of households enabling continued support for the economy and housing.
“Whether there is a mild recession (our base case) or a soft landing, the supply issues in housing will provide a downside cushion for economic activity,” Duncan said. “That is playing out quite close to forecast on existing homes, but new construction has been even more supportive than we expected.”
High levels of inflation could also affect the market as consumers find it more difficult to save up for a down payment, or have less cashflow for the monthly payment on a home.
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