It’s no surprise that the Federal Reserve is on standby, with inflation not fully under control. In the short term, it is all about oil and energy prices. Up until this year’s oil price shock, a typical American’s standard of living had been rising steadily over the past three years as wage growth outpaced consumer price inflation. By May, however, consumer price inflation ate up wage growth and more. Some reprieve was felt in June when oil prices retreated, but oil prices are up again in late July. Going forward, higher oil prices will mean higher inflationary pressure and higher mortgage rates, with a lower mortgage rate outlook if oil prices were to fall.
The housing sector is helping to lower long-term inflationary pressure. Abundant apartment construction has contributed to lower rent in many parts of the country. Home price growth has been below wage growth. In fact, in the most recent data, the housing component to overall inflation was running at a 1.4% annualized rate, one of the lowest monthly figures in the past decade. Even so, the Federal Reserve will not cut interest rates until oil prices and overall inflation fall to more favorable levels.
