Wednesday, April 17, 2024

Inflation Accelerates in January, Two More Rate Hikes Now Likely

By Gay Cororaton, MIAMI REALTORS® Chief Economist


Inflation picked up in January 2023 across a broad array of items, with the overall price of consumer items rising at a stronger monthly pace of 0.52% in January 2023 from just 0.1% in the prior month. Compared to one year ago, inflation just slightly fell to 6.3%.

The rate of inflation net of food and energy prices (core inflation) also essentially was unchanged at 0.41% from 0.4% in the prior month. Compared to one year ago, core inflation stood at 5.5%.

Prices of food, energy, transportation, apparel, and medicine all increased at a stronger monthly pace compared to the prior month. The index for meats, poultry, fish, and eggs increased 0.7 percent over the month, as the index for eggs rose 8.5 percent due to the negative effect of the Avian flu on chicken and eggs production. Eggs are used in a variety of food products, so the index for cereals and bakery products rose 1.0 percent over the month. Food prices are up 10.1% from one year ago. The cost of transportation rose 14.6% from one year ago.

The cost of shelter (rent) continued to rise at a strong monthly pace of 0.7%, with the shelter index up 7.9% from one year ago. Shelter accounts for about a third of consumer spending. The cost of electricity remained elevated at 11.9% from one year ago.


Inflation to Remain Elevated at 4% by Year-end

Rising oil prices, wage growth, and Avian flu supply shock will tend to push prices upwards, while the continued easing of supply chain bottlenecks will mitigate these upward price pressures. On balance and taking into account the Fed’s intent on slowing inflation, the monthly pace of inflation is likely to slow from the current pace of 0.5%. If inflation heads to a slower monthly pace of 0.3%, inflation will end at  4% by year-end.

With a strong labor market, the average weekly earnings of private employees adjusted for seasonality edged higher by 1.2% January from the prior month, the strongest monthly increase since the Bureau of Labor Statistics tracked this wage metric since 2006.  Wages rose with 517,000 net non-farm payroll jobs created.

The Organization of Petroleum Exporting Countries (OPEC) expects oil prices to hover at $86/barrel amid rising global demand  mainly coming from China and supply cutbacks emanating from Russa.[1] As of February 14, the price of crude oil stood at $78/barrel.   Russia has announced a reduction of 500,000 barrels per day in retaliation for the EU import ban and the price caps on its oil exports. Meanwhile, China’s relaxed COVID-19 restrictions is also expected to raise global demand for oil, with China’s consumption is expected to jump by 800,000 barrels per day.

However, the easing of supply chain bottlenecks will mitigate the impact of these inflation pressures. The producer price index—a leading indicator of inflation—fell 0.5% in December 2022.


30-Year Fixed Mortgage Rate Still Likely to Hit 5% – 5.5% by Year-End

Combined with the strong job report in January and the strong uptick in wage growth, today’s inflation report increases the likelihood  that the Fed will go for the remaining 50-basis point rate hike to control inflation. The Fed already delivered a 25-basis point rate hike at the conclusion of its January 31-February 1 meeting, so another 50-basis point increase is on the horizon given the inflationary pressures at hand.

I expect that with inflation still possibly falling to 4% by year-end, the 30-year fixed mortgage rate could still fall towards 5.0% – 5.5% by year-end.

[1] OPEC raises 2023 oil demand growth view, points to tighter market | Reuters


30-Year Fixed Mortgage Rate Still Likely to Hit 5% – 5.5% by Year-End

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