The inflation game: have we hit the peak yet?

Both the consumer price index and the producer price index were released in the last week and showed inflation is still near 40-year highs. The Bureau of Labor Statistics' data showed the CPI accelerated 8.3% year-over-year with the PPI increasing by 11% year-over-year. The CPI is a broad-based measurement of the price of goods and services while the PPI tracks how much manufacturers get for products at their initial sale. 

The Federal Reserve closely watches the core CPI, which excludes the more volatile goods like energy and food, as its preferred gauge for inflation. April's core CPI showed a 6.2% year-over-year increase, just above the 6% estimate. There was some hope that inflation peaked in March, but this latest reading puts a damper on that.

The housing industry continues to feel the strain of inflation as well with home prices and interest rates continuing to rise. The latest 30-year fixed-rate mortgage average from Freddie Mac was 5.3%, up slightly from the week before but up more than 2 percentage points from this time last year. That rise in rates means monthly payments are about one-third higher now than they were a year ago. Freddie Mac's economists note, however, that first-time homebuyers are still driving the market and showing resilience. They added a bit of a gloomy outlook though, saying, "In the months ahead, we expect monetary policy and inflation to discourage many consumers, weakening purchase demand and decelerating home price growth."

It is likely that rates will continue to rise over the next couple of weeks as investors started to push their money back into the recently flailing stock market in order to avoid bear territory. Recently, investors have been putting their money into the relative safe haven of government bonds like the 10-year Treasury note. When that happens, yields dip slightly as price goes up. Mortgage interest rates typically follow the trajectory of the 10-year Treasury note yield. Now, as investors move back into stocks, the price on the 10-year note will go down as the yield goes up. That likely means mortgage interest rates will rise along with it.

Fed Chairman Jerome Powell further stoked this continued volatility this past Thursday. Speaking on CNBC's Marketplace, Powell said the Fed couldn't promise a "soft landing" for the economy. The Fed recently instituted a 50 basis point increase to the federal funds rate, bringing the target range up to 0.75%-1.00%.

THE OTHER SIDE OF HIGH PRICES

For first-time homebuyers trying to purchase a home, the current market is extremely daunting. Not only is the competition still fierce, but prices are extremely hard to stomach. Conversely, current homeowners are seeing extreme benefits from the rise in home prices.

Equity rich is a term used for homeowners who have at least 50% equity in their home. When home values rise like they've done over the last two years, that increases home equity. A recent study by ATTOM, a curator of real estate data, showed that nearly 45% of mortgaged homes in America were considered equity-rich in the first quarter. 

In a statement, ATTOM's Executive Vice President of Market Intelligence, Rick Sharga, said “Record levels of home equity provide financial security for millions of families, and minimize the chance of another housing market crash like the one we saw in 2008. But these higher home prices and rising interest rates make it extremely challenging for first time buyers to enter the market.”

But, the silver lining for first-time homebuyers is that the mortgage industry is very cyclical and even this stretch is not expected to last much longer. “It's likely that equity will continue to grow through the rest of 2022, although home price increases should moderate as the year goes on,” Sharga said. “Rising interest rates, the highest inflation in 40 years, and the ongoing supply chain disruptions due to the war in Ukraine are likely to weaken demand and slow down home price appreciation.”