Consumer Price Inflation Moderating, Shelter Costs Decelerating

The latest data show moderating consumer price inflation, largely thanks to rapidly decelerating housing/shelter costs. Overall, consumer prices rose by 2.7%, still above the target comfort rate of 2%. Normally, the Federal Reserve would wait until inflation is near the target before cutting interest rates; however, it has cut short-term rates three times since September due to the softening labor market.

Despite the tariffs' inflationary impact, the biggest weight in the measurement comes from housing/shelter. People spend around 30% of their budget on housing; thus, it is a significant share of the CPI measurement. Shelter costs rose by 3.0% from a year ago, marking the slowest rise in over four years. The rapidly decelerating shelter cost could help mitigate the stagflationary pressures of rising inflation and unemployment rates. Further deceleration could be underway, given massive apartment completions and home prices rising at very low, single-digit gains.

Home insurance costs are a bummer. They rose by 7% on top of high figure gains over the past two to three years. This rise explains why condominium sales have been lagging behind single-family home sales, despite lower condo prices.
Gasoline prices are essentially at a three-year low. This can filter down to other prices over time, including Chinese-made toys, as the shipping costs via 18-wheelers fall.

If the inflation rate continues to improve, the Federal Reserve can make additional rate cuts. Further, the 10-year Treasury yield and, consequently, mortgage rates can also decline.