What happened: Good news on the inflation front as the latest month-over-month Personal Consumer Expenditures (PCE) and trimmed PCE data moderated further towards the Federal Reserve’s inflation target. The PCE price index ticked up less than 0.1% month over month in October, and moderated from annual growth of 3.4% in September back down to 3% in October. Core PCE nudged up just 0.2% on the month, while annual growth receded to 3.5%, down from 3.7% in September.
What it means for the housing market: Getting a bit of a break on mortgage rates — not returning to the 3% lows during the pandemic, but falling from today’s rates — will depend on the slow and steady moderation of economic activity and inflation continuing in the coming months.
There were many signs in this month’s release pointing to continued disinflation. The labor market is cooling. Consumer spending remains strong, but the pace is slowing. Supply-side bottlenecks are easing and energy prices have declined sharply. Beyond that, home appreciation and rent growth continued to moderate, due in part to more homes coming from new construction.
With inflation and inflation expectations continuing to move toward the Federal Reserve’s 2% target for inflation, a Fed policy pivot becomes more likely, if only to prevent monetary policy from becoming more restrictive and engineering an economic downturn. But if a soft landing means recession averted then even if short-term yields fall, long-term yields are likely to fall by less and remain somewhat elevated.
A return to the 2% target would mean less volatility in mortgage rates moving forward – which would help both buyers and sellers and sellers plan their next moves after years of uncertainty.
It’s too soon to celebrate, but a few more releases like this one would be a great sign that we are in a good position in the battle against inflation.