There is still a ways to go before the Fed can breathe a sigh of relief, but at least some solace can be taken in the fact that the cooldown in U.S. inflation hasn’t let up.
Most can agree that the banking crisis took up much of the attention of onlookers and federal officials in March—for a good reason. However, the latest CPI report shows that overall inflation came in at 5% in March, down a whole percentage point from February’s 6%.
Not only does this mark another month of moderation in the annual inflation since it peaked in June 2022, but the reading is also the lowest level in nearly two years, according to the Labor Department’s Wednesday report.
Despite the persisting downward trend in overall inflation, core inflation, which excludes volatile energy and food prices, climbed 5.6% in March, up slightly from 5.5% in February. Core prices rose 0.4% month-to-month, based on the report.
March’s CPI data gained mixed reviews among pundits in the real estate sector, particularly as they delved into the impacts of interest rate hikes and elevated inflation on mortgage rates.
“Calmer inflation means lower mortgage rates, eventually,” said Lawrence Yun, chief economist for the National Association of REALTOR®. “The 5% consumer price inflation in March is a steady improvement from 9% last summer, 8% in autumn, 7% during Christmas and 6% in the early months of this year.”
Inflation remains elevated—well above the 2.1% average in the three years before the pandemic and the Fed’s 2% target.
According to Yun, the “ideal inflation” the Fed wants to reach is likely a year away. Still, he thinks the downward trajectory that the CPI has been on over the past nine months is a “clear signal to the Fed to change its tightening monetary policy, especially considering that many regional banks are still on the edge of further interest rate risk blowup.”
Following a modest increase in interest rates last month, Fed officials hinted that they might end their rate hike efforts following their March meeting.
That was a similar sentiment that Fed Chairman Jerome Powell shared in a post-meeting press conference as he addressed developments in the banking sector earlier in the month.
“Since our previous FOMC meeting, economic indicators have come in stronger than expected, demonstrating greater momentum in economic activity and inflation,” he said at the press conference.
He also noted that the collapse and subsequent bailouts of Silicon Valley Bank and Signature Bank could likely result in tighter credit conditions for households and businesses, impacting economic outcomes.
The cost of shelter was also the most dominant factor in the monthly increase of overall and core inflation. The index, which offset energy decreases last month, rose 0.6% from February to March, and tallied an annual increase of 8.2%.
Rising shelter costs carry their own bag of challenges looking ahead, according to Dr. Lisa Sturtevant, Bright MLS chief economist.
“The challenge with housing is that there are so many factors beyond the control of the Federal Reserve keeping housing costs high,” she said in a statement. “High inflation led the Fed to raise interest rates, leading to higher borrowing costs, including making it more expensive to finance a home purchase. These higher rates are designed to lower demand for housing (and all sorts of other things) to reduce upward pressure on prices.”
Sturtevant acknowledged that the Fed’s efforts to reel in inflation with rate increases have worked to slow demand and ease price growth, particularly as higher mortgage rates slowed demand by pricing some would-be buyers out of the market.
However, the housing sector still has challenges that the Fed can’t address.
“Rate hikes will not solve the housing affordability problem when lack of supply is what fueled rising home prices,” Sturtevant said. “What we need is more housing supply to bring down prices and make housing more affordable to more people.
“The Federal Reserve is not going to solve the problem, no matter how much some people hope that is the case,” she continues. “In reality, the solution is tough choices at the local level to reduce regulation and responsibly encourage more housing in the places that are best connected to jobs, transportation, services and amenities.”