Implications of October's Improvement In Inflation

Ryan Heshmati

November 17, 2023

The Consumer Price Index’s October numbers indicate a deceleration of inflation from a 3.7% annual pace to 3.2%. While inflation is still well above the 2% figure the Federal Reserve aims for, the decline in inflation is still fantastic news. If it continues declining and reaches 2%, interest rates will likely go down, aiding many Americans.

Currently, mortgage rates are at incredibly high levels compared to the very low rates available only a couple of years ago. CNN’s Anna Bahney reports that the mortgage rates have softened for three weeks in a row, noting the average rate on a 30 year fixed rate loan is now 7.44%. Of course, 7.44% is still quite high; however, if inflation, and thus Fed-set interest rates, decline more, mortgage rates will likely follow suit. Such a decline in mortgage rates would provide much needed relief for many prospective homebuyers unable to afford monthly payments on loans at 7%+. In October, Bahney headlined a National Association of Realtors report pinning home sales volume at its lowest point in thirteen years. If rates return to low levels, sellers will likely not be concerned with selling property with a locked in low rate the same way they might be today, where they stare down 7%+ rates on their subsequent purchase.

Lower inflation’s positive impacts would almost certainly spread beyond the housing market, however. Recently, bonds have seen abhorrent returns as their prices have plunged to keep up with interest rates. If rates go down, the bond market might see a resurgence. Hedge fund manager Bill Ackman had been betting against U.S. treasury bonds, which proved lucrative as their values declined, but covered his short in October. Should bonds be done with their crash, they have a lot of ground to make up. The share price of TLT, iShares’ 20+ year Treasury Bond ETF was down well over 35% in the two years between 11/17/2021 and 11/16/2023. It is worth noting that actual losses are lower as the ETF paid dividends during the period.

While inflation’s continued decline to reaching 2% would likely be great news for many, it has not happened. Even if it does reach 2%, there is no telling how cautious the Federal Reserve will be in consideration of potential interest rate cuts. Still, there appears to be reason for optimism in bonds and for homebuyers. Heading into an election cycle, with lackluster real estate transaction volume and depressed bond prices, the coming year will assuredly be well worth careful monitoring.