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Headline Hype Aside, Here Are 2022-23 Inflation & Rate Endgames

By Julian Hebron, founder of The Basis Point

In the meme stock era, perception of headlines is reality, and no consumer or pro is immune. Here’s a flavor of headline noise barraging our feeds and focus in 1Q 2022: 

  • How 40-Year High Inflation Will Ruin COVID Recovery
  • 45 Million Millennials Ready To Buy Homes, But Timing Is Terrible
  • Bidding Wars & Affordability Deflating Homebuyer Dreams

Highly clickable themes, right?

Wrong! Don’t let the hype steal your focus. Instead, let’s look at these red hot and legitimately important topics as true pros who must understand the endgames for each. That way, we can make clear decisions for clients, partners, team members, and ourselves.

Inflation Spike Drops By 2023 with Sturdy Economy Until Then   

Let’s start with the endgame on inflation. Right now, all-in CPI (Consumer Price Index) is 7.5%, a headline-grabbing number far outside of the Fed’s 2% to 3% comfort zone for inflation.

As for the endgame, Goldman Sachs’ economic research team sees full-year inflation (as measured by all-in CPI) cooling to 4.4% during 2022 and to 2.9% during 2023. The rest is chatter to consumers, nuance to pros, and anxiety-producing for all.

To clarify chatter and ease anxiety, let’s quickly review three nuances.

First, to help get inflation back to that 2% to 3% comfort zone, consensus estimates call for the Fed to do roughly seven 25 basis point hikes on overnight bank-to-bank lending rates this year, and to slow or stop bond buying – which keeps long rates like mortgages low – by March. See next section for rate impacts.

Second – and perhaps most important – all-in CPI doesn’t influence Fed policy decisions nearly as much as Core PCE, which is the Personal Consumption Expenditures index minus more volatile food and energy prices.

Annualized Core PCE inflation is now 4.9%, lower than headline all-in CPI but higher than the Fed’s comfort zone. Goldman sees full-year Core PCE cooling to 2.9% during 2022 and to 2.2% during 2023, which is even lower than the endgame noted above. 

Third, high inflation represents today’s hot economy, which will moderate and inflation will follow. GDP is hot at 6.9% now, but Goldman sees that returning to 3.2% in 2022 and 2.2% in 2023.

The U.S. created 467,000 jobs in January 2022, but consensus estimates call for 2022-2023 monthly jobs growth to be less than half of that.

2022 Rate “Spike” Means Crazy Low 4% Mortgage Rates     

All of this adds up to inflation moderating this year and next. but mortgage rates have already spiked – from 3% in December to 4% now – in anticipation of the Fed reversing rate stimulus to control inflation.

So, will this rate spike kill 2022-23 home sales?

That’s what the headlines say but the endgame is 4% rates with 7.3 million new and existing home sales this year; and 4.3% rates with 7.6 million new and existing home sales next year, per MBA.

That’s a very healthy housing market.

At 4%, rates are already at their full-year projection for 2022, but it’s normal for rate markets to trade ahead of Fed or other economic influence. This isn’t to say rates won’t go higher than current projections, it’s just to inform the less informed headlines.

It’s also worth considering that rate shock headlines are relative. Mortgage rates dropped to 4% for the first time about 10 years ago, which led to an entire era of “crazy low” 4%-range rate headlines.

Now headlines say the “timing is terrible” for homebuyers because rates are now at 4%, but the healthy home sales growth projections above prove this wrong.

Plus, it’s critical to note that rate projections account for inflation, jobs, and GDP data. And home sales projections account for record low housing inventory.

Finally, an important nuance alert. It’s normal to see “homes less affordable” headlines when inflation spikes, but consider these two factors:

First, rate spikes moderate and income goes further as inflation comes down by next year. And second, total mortgages made to homebuyers are actually rising in this era as follows (per MBA): 4.87 million loans in 2021, 4.82 million in 2022, 4.96 million in 2023.

Let’s Focus on These Endgames

The nanosecond you’re done reading this you’ll move to another screen with a shocking headline. It will have hints of credibility, but mostly it’ll lack the full perspective noted above.

I also noted above that no consumer or pro is immune to headline perception shaping their reality.

So, if you take nothing else from this quick read, take these 2022-23 inflation and rate endgames:

  • Core PCE – the inflation measure that most influences Fed rate policy – is projected to be 2.2% by the end of next year, per Goldman Sachs. This is well within the Fed’s comfort zone.
  • Mortgage rates and home sales are projected to be 4.3% and 7.6 million, respectively in 2023, per MBA. These projections account for Fed policy actions, low housing inventory, rising home prices, and also GDP and job market projections.

This means the economy looks sturdy despite inflation concerns, and housing looks stable despite low inventory and rate concerns.

These datasets are updated all the time, so you can follow along at The Basis Point.