How Current CPI Readings Affect You

CPI figures might seem conceptual when it comes to informing clients, but they reflect the everyday experience of Americans in a very real way. For example, that last trip you made to the grocery store. 

Did you know that if you spent, let’s say, $50 on a grocery today, you would end up receiving around 6.5% less than you did just one year ago? CPI displays the general purchasing power of a consumer. Inflation is driving up prices.

This makes understanding the story that the CPI is telling vital to serving your clients (consumers) and running a business, especially in the mortgage industry, as interest rates get affected. So let’s break down what we see here. 

Overall Vs. Core CPI Reading, Why You Need to Know the Difference

As of January 12th, 2023, we received a Core CPI reading of 8.3%. Exactly what we expected. Along with that, we got an Overall reading of -0.1%. What does that mean? 

The Overall, or total, CPI is like putting all your items in a shopping cart and calculating the total price of everything, then comparing the difference over time. If that total number went up, it reflects that prices went up, and the inverse is also true. 

The -.1% reading we got means that prices came down, which allows us to infer that interest rates may follow that trend too. 

The Core CPI excludes certain items that tend to have volatile prices, such as food and energy. Core CPI is considered “a more reliable” indicator of underlying inflation trends because it eliminates the influence of these volatile items. The Federal Reserve often uses the core CPI as a guide when setting monetary policy to achieve stable prices and maximum employment.

So while the total number was down, the core readings revealed a .3% increase. But again, this number was expected. 

Why Expectations Matter for Interest Rates

If you’ve spent some time in any investment market, then you know that the market loves certainty and hates uncertainty. You can have all numbers and trends pointing towards continued success, but if doubt enters the market in any form, your assets will generally not perform as well. 

When it comes to the latest CPI readings, even though there was a bit of an increase, it met expectations. That has built some confidence or certainty of what will happen in the market. 

The Federal Reserve will not increase interest rates higher than the current pattern of inflation. That means that stocks and the mortgage industry will benefit as they return to a level of certainty. 

June Forecasts and Growing Debt Show a Looming Uncertainty

Before we celebrate too much, we need to remember the most pivotal month in 2023: June. June is when calculations potentially start rising again. This is the month when we typically start replacing small numbers with bigger ones. That makes the margin of error much smaller. 

The reason this matters is that, here in the real estate world, we want to predict what interest rates are going to do. If the Fed raises interest rates, this will also raise the debt service and coverage of our national debt. As a result, we may end up seeing a subsequent easing of interest rate hikes so as not to put pressure on debt service. 

Another interesting occurrence we’re facing right now is that consumer credit card debt is at an all-time high of $925 Billion. That’s comparable to the highest on record, which is $927 Billion—a number we most likely surpassed already. 

This hurts when it comes to inflation because inflation happens when we put more dollars into the economy. Rising debt (as it goes unpaid by consumers) means creating more dollars owed, which subsequently means more money is set to enter circulation.  

Bottom Line—How Can We Act

While the CPI seems complicated and abstract, it impacts consumers and our entire economy. While we’ve experienced some small wins, like the latest readings coming out as expected, we’re not out of the woods of rising interest rates and inflation yet. 

So what happens if you’re in the mortgage industry or looking to get a mortgage? As we’ve stated in previous blogs and episodes, waiting to see what happens is not an option. For example, we spoke about buying now on a 2-1 Buy Down and then refinancing later to get a lower mortgage interest rate.

With things like rising debt looming over us, people (especially in the mortgage industry) are going to need help. We will most likely see a refinance rise. In the next coming months, we expect to see interest rates come down to the 5s. This is the best time to advise your clients to take advantage and refinance before we enter another cycle of uncertainty.