Instant Reaction: Inflation, July 12, 2023

Low inflation means low mortgage rates. Therefore, decelerating consumer prices could steadily lift home sales and increase home production in a few months.

CPI rose by 3% from one year ago, which is much lower than the 8–9% hikes of last summer and is the slowest gain in over 2 years. Falling gasoline prices and healthcare service costs were helpful. Rents are still climbing at a brisk pace, rising by 8.3%, but have turned the corner for sure. Rents were rising at 8.8% in the early part of the year, so this is the slowest gain in 7 months. The one-month rent gain of 0.5% (or a 5.8% annualized gain) is suggesting further calming in rents in upcoming months. Moreover, with so many empty apartment units under construction, rents could plateau by this time next year.

The Federal Reserve's mandate is to contain inflation and help the economy. It misjudged the early strength of inflation, which got out of control. Now it could misjudge on the economic front. Monetary policy works with a long lag time. The Fed appears too focused on the lagging economic indicator of jobs rather than early indicators like future inflation and commercial leasing activity; they should look ahead and stop raising interest rates.