The latest report on Personal Consumption Expenditures (PCE) showed prices climbing by 0.3% from last month, an expected but still potentially concerning increase in inflation as the Federal Reserve mulls its next move on interest rates.
The PCE index, which is the Fed’s preferred measure of inflation, came in at 3.3% year-over-year, with core inflation (excluding food and energy) at 4.2%.
After peaking at 7% last summer, the small increase is far from a major relapse as most economists have agreed that inflation is still on the right track. Investors were also unfazed by the move, with all three major indexes up in early trading following the report.
But with Fed Chair Jerome Powell adamant about reaching 2% inflation, any uptick could push the central bank to raise rates further—something that would dampen an already sluggish real estate market that has slumped under the weight of 7% mortgage rates.
Harvard economist Jason Furman also said on X (formerly known as Twitter) that the report still constituted a “steady slowdown” in inflation, and argued that the Fed shouldn’t raise rates as long as the current trajectory is maintained.
“I continue to think that wage growth suggests a higher underlying inflation rate than we’re just seeing in the price data. So expect some pickup in core inflation to the 3 %- 3.5% range,” he wrote. “And the last mile could be harder. But, this is all going pretty well for now.”
Eric Rosengren, former president and CEO of the Boston Fed and visiting scholar at MIT, highlighted on X how goods and services have diverged in recent months.
“The dichotomy between services declining gradually over time and significant declines in goods continues,” he wrote. “(Year-over-year) services (up) 5.2%…while goods (are down) -0.5%.”
While the economy hangs in the balance as further bank woes or labor market losses could still tip the country into a recession, the concern for real estate is even more immediate.
A hawkish Fed raising rates again this year, or holding them at restrictive levels for a longer period, could greatly exacerbate already historic affordability and inventory issues.
Last week, Powell told a gathering of policymakers at Jackson Hole that the housing sector “is showing signs of picking back up,” something he said could “warrant further tightening of monetary policy.”
“These uncertainties…complicate our task of balancing the risk of tightening monetary policy too much against the risk of tightening too little,” Powell acknowledged. “Doing too little could allow above-target inflation to become entrenched…(doing) too much could also do unnecessary harm to the economy.”