The Rent In CPI Is Too Damn High. Also 5.5% Core CPI way above Fed target. What now?


In March, headline CPI inflation dropped meaningfully from 5.9% to 4.9% and today’s April report held this line at 4.9%. But April annual Core CPI, which excludes volatile food and energy costs, is stubbornly high at 5.5%, down just slightly from 5.6% in March. Still, inflation is trending down, and after 10 rate hikes in 14 months, the Fed may pause at its June 14 meeting. Here are a few key takeaways.

The March-to-April monthly Core CPI level is 0.4%.

Good news: If you annualize this, it’s 4.8%, which is trending down.

Bad news: The actual annual number is still 5.5% (see chart above).

More good news:

Peak headline CPI inflation was 8.9% in June 2022 vs. 4.9% in April 2023.

Peak Core CPI inflation was 6.6% in September 2022 vs. 5.5% in April 2023.

So what’ll it take for Core CPI inflation to drop from here?

Hint: lower housing costs may help.

The rent component of CPI is still 8.8%, which contributes to these high inflation readings.

But CPI measures existing rents people are paying, using leases signed up to a year ago.

Meanwhile, reports March 2023 advertised rents were down to $1937, the first yearly decline in 36 months.

Advertised rents indicate what we’d pay to rent today.

So if this trend continues a few more months, the rent component of CPI should come down.

This would in turn bring Core CPI down.

Here’s what this means for mortgage rates:

Rates are up to about 6.625% after a strong April jobs report Friday.

But they may come down a bit after today’s encouraging inflation trend.

We don’t have to get to the Fed’s 2% Core CPI target for mortgage rates to drop.

If the market sees Core CPI drop closer to 5%, mortgage rates may begin to drop too.

Mortgage bonds will rally as they perceive inflation is coming under control.

This rally will happen long before Core CPI ever gets to 2%.

And rates drop when bonds rally like this.

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Inflation peak recap and Fed hike recap shows advertised rents are still high, but coming down

All April inflation categories in one chart (CNBC)

April 2023 CPI inflation by category all in one chart via CNBC - The Basis Point

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