Peak Inflation Ahead? Not Without Peak Housing
Last week, we referenced signs pointing to a pause and eventual end to the historic rise in housing prices, a major contributor to the inflation currently weighing on the economy. The Fed’s shift in monetary policy has pushed mortgage rates significantly higher these past two months. The resulting decline in mortgage applications and home sales are indications of what we believe will be the arrival of Peak Housing, a key factor in tempering inflation. We see confirmation of that view in the substantial decline in housing-related commodity futures prices, a forward-looking indicator. There’s also the slight downtick in personal spending that hints of an ebb in the “Wealth Effect” that usually accompanies a decline in home prices. A cooling of the housing market will have multi-layered and widespread ramifications for the economy and is an essential element of regaining control over inflation.
This week’s housing data, courtesy of the Case-Schiller Index, showed a record price increase of 3.1% for March and a year-over-year surge of 21.2% in the aggregate of 20 cities comprising the index. However, the CSI is a lagging indicator and that data referred to prices in the month that marked the Fed’s first interest rate hike that led to the subsequent upswing in mortgage rates. We anticipate a moderation of price increases for April and, going forward into the summer, perhaps a decline in nominal prices for a number of those cities in the index. We’re not calling for a major decline in aggregate prices by any means but rather a beginning of what we believe to be a period of moderate downward price adjustment for the housing market. We view Peak Housing to be crucial to achieving Peak Inflation and we’re guessing that the CSI may have topped out in March, or will in April.
We had another good news-bad news data point delivered in today’s employment report. Full employment and hefty job growth being good news for the economy while the market viewed it as a failure to lower inflation right now. As usual, the market reacts in the moment, creating volatility, while those of us looking to a longer time horizon see it as a gradual move toward a soft landing while avoiding recession. Next Friday, the CPI inflation report will be released, no doubt raising speculation in the media, and hence the market, about the Fed’s next move at their meeting the following week. Regardless, we expect to see some moderation of inflation in that report with the Fed remaining on course for a 50bp hike in the Fed Funds rate. Stay tuned.