The State of U.S. Inflation Heading into a Critical September Meeting

Latest Inflation Indicators, and Position of the Federal Reserve

Whether you believe that summer ends on Labor Day, or on the officially marked end of summer, on the 23rd of September, there is no doubt that fall is near. Temperatures are beginning to drop, college football has begun, and the NFL season just started this week. With that in mind, I thought it would be a good idea to provide an update on the Federal Reserve’s battle against inflation as well as look ahead at what the Fed will potentially do to further combat inflation, and how their actions could affect the economy.

Latest Indicators of Inflation

Before we dive into the Fed’s stance on the state of inflation, it’s important to go over the latest inflation indicators to provide some context. The latest Personal Consumption Expenditure (PCE) report, released on August 31st, marked a 0.2 percent increase over the previous month, and a 3.3 percent increase from the number reported for July 2022. The PCE price index is the preferred indicator for the Fed, but they will also closely watch the Consumer Price Index (CPI), which is the more commonly known indicator of inflation data. The PCE price index captures a more complete view of inflation data, as it compiles more data than the CPI.

According to the Utah Department of Workforce Services, “The PCE captures payments made out-of-pocket by households plus payments made on behalf of households, such as medical care services paid for by employer-provided health insurance or by Medicare and Medicaid”.

Additionally, PCE values are also adjusted monthly, which allows the PCE measurement to be more accurate. CPI measurements, however, are not subject to monthly adjustments. While the value in July of this year is slightly up from the month before, it is still within striking range of the Fed’s goal of 2%. An additional inflation indicator is the job market, with the Associated Press reporting that the number of advertised job openings fell in July, which

“...eases pressure on companies to raise pay to find and keep workers - a move that tends to perpetuate inflation as employers raise prices to offset their higher labor costs”.

How Do Members of the Federal Reserve View the State of Inflation?

The Fed has previously raised its benchmark interest rate 11 times, with the latest hike coming in July of this year during their most recent meeting, taking the key interest rate to around 5.4%--the highest level in 22 years. The question now on everyone’s mind is whether the Fed will continue to raise interest rates in the remaining months of the year or decide to wait and analyze more incoming data before further increasing rates. It’s a slippery slope for the Fed to navigate, as raising interest rates too high could cause a recession, but declaring a premature victory on inflation and halting rate hikes or even lowering rates could see inflation resuming its rampage on the U.S. economy.

In an interview with the AP, Raphael Bostic, the president of the Federal Reserve Bank of Atlanta, noted that,

“We’re going to have to keep our rate higher for longer than historically happens, because we need to make sure that inflation stays at 2% …. I don’t have us even contemplating a rate cut before the latter part of 2024. We’re going to be at a restrictive level for quite a while, and that just assumes that this last bit of inflation trajectory is going to be steady but relatively slow.”

Bostic is a member of the Fed’s interest rate policy committee, which votes on whether or not they will raise, pause, or decrease interest rates. Another member of the interest rate policy committee, Susan Collins, president of the Boston Federal Reserve, said during an interview with Yahoo Finance that,

“While we may be near, or even at, the peak for policy rates, further tightening could be warranted, depending on the incoming data”.

Expectations for Future Inflationary Actions by the Fed

Currently, it is believed that the Fed will decide not to raise or lower its interest rate further during their upcoming meeting on the 20th of September. The reasoning for this is based partly on the positive inflationary data mentioned earlier, as well as the stances of key members of the Federal Reserve, including the chair of the Federal Reserve, Jerome Powell, who mentioned in a recent speech that

“Two months of good data are only the beginning of what it will take to build confidence that inflation is moving down substantially toward our goal. We can’t know the extent to which these lower readings will continue.”

How Does Inflation Affect the Housing Market

While the Fed raising its interest rate does not directly affect mortgage rates, it does directly affect the banks that provide mortgages, which in turn drives mortgage rates up. Because mortgage rates are so stubbornly high, housing costs are high as well, which is a large contributor to inflation indicators like the CPI and PCE mentioned above. Because of this, now, more than ever, it’s important to work with an experienced and professional REALTOR Ⓡ who knows the local market inside and out.

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