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Inflation Slows to 7.1% in November 2022, With Shelter as Main Inflation Driver

Economic Insights
Economic Insights from the MIAMI REALTORS Chief Economist

By MIAMI Realtors® Chief Economist Gay Cororaton

 

Inflation continued to decelerate in November 2022 to a monthly pace of 0.1% and a year-over-year pace of 7.1%, according to the Consumer Price Index (CPI) released Dec. 13, 2022. Shelter (rent and lodging away from home) was the main inflation driver, followed by food, offsetting the decline in energy prices. Core inflation (net of food and energy prices) slowed to 0.2%.

 

Inflation has increased faster in Miami than nationally due to strong employment and migration into the area. As of the first half, inflation was also running at 9.8% (9.1% nationally). The pace of inflation in Miami is likely to remain elevated compared to nationally with rents and home prices rising more strongly than nationally. As of December 1, the median rent on a 2-bedoom apartment was at $2,942, up 11% year-over-year, while the median sales price of a single-family home was $550,000, up 25.5% year-over-year.

 

Expect a 50-Basis Point Increase in the Fed Funds Rate & Mortgage Rate to Decline Towards 6.25%

Market participants are expecting the Fed to deliver a 50-basis point increase in the federal funds rate in its December 13-14 meeting, bringing the federal funds rate to an upper limit of 4.25%. That they will do so is almost certain given the November inflation reading that showed inflation is broadly waning across food, energy, shelter, transportation, and medical services.

 

I anticipate that even if the Fed raises the federal funds rate, the 30-year fixed mortgage rate will continue to decline towards 6.25% because of lower inflation and expectations that inflation will continue to decline. If core inflation stays at the current pace of 0.2% monthly, expect inflation to average just 2.4% over the next 12 months, which is in line with the Fed’s target of 2%.

 

Shelter was the main inflation driver, up 0.6% from the prior month, the largest increase among major consumer items. Shelter accounts for the largest component of consumer spending, at 32.7% or a third of consumer spending. While the rate of increase in shelter cost has slowed compared to the prior month (0.8% in October), the current pace is still double the pre-pandemic average month-to-month rate of 0.3%.  This means that a further slowing down in the pace of rent growth, home price appreciation, and the mortgage rate are key to bringing down inflation to the 2% target.

 

Rent consists of the rent on primary residence and owner’s equivalent rent of residences, or what owners would rent their homes for.  The purchase price of a home is not factored into the consumer price index (CPI) directly, but it is indirectly factored into the CPI by homeowners because homeowners would likely rent their home to at least cover the mortgage payment.

 

The recent deceleration in rent growth, home price appreciation, and mortgage rate are all going to contribute to a further deceleration in the rate of inflation in the coming months. Nationally, the typical rent on a 2-bedroom apartment rose at a more modest pace of 4.5% year-over-year as of November from nearly 20% one year ago (Apartment List.com). Home prices are rising at a slower pace of 6.6% as of October (NAR). The 30-year mortgage rate climbed down to 6.33% in the week of December 8 after hitting as high as 7.1% during October (Freddie Mac).

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