Inflation Slowed More Than Expected In February. Housing Costs Still Held Back Progress.

What happened: The Personal Consumption Expenditures (PCE) price index rose 0.3% in February after increasing 0.6% in January. Core PCE — the Federal Reserve’s preferred inflation gauge — also rose 0.3% month-over-month.
What it means: Although prices are still 5% higher when compared to a year ago, the pace of price increases slowed further in February. Annual goods inflation slowed to 3.6% in February from 4.7% in January. However, services — especially shelter costs — continued to hold back disinflation.
Zillow Senior Economist Orphe Divounguy’s perspective: The latest inflation data is another step in the right direction, and ought to eventually pull down mortgage rates. As inflation falls, longer term U.S. Treasury yields should fall, with mortgage rates following. That is good news for would-be buyers who have been frustrated by affordability challenges and a lack of new options hitting the market in recent months
However, more restrictive lending due to the recent banking turmoil could keep mortgage rates elevated in the near term and keep the housing market on ice in what is typically the hottest time of year. Higher mortgage rates are keeping many sellers on the sidelines who do not want to give up their current mortgage with a much lower interest rate.
The current pace of disinflation is roughly in line with the Federal Reserve’s projection of core PCE at 3.6% for the year. However, slow progress on the inflation front is in part due to housing and healthcare — sectors that are both affected by persistent supply-side challenges. The housing components of the PCE price index are expected to edge lower. However, progress to alleviate housing supply challenges through measures like allowing for more density is needed to bring down housing costs.
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