While talks of a recession have receded and while the American economy is proving resilient in many sectors, there is still a plethora of issues that are burdening Americans and putting a strain on their wallets. And now, with 2024 just weeks away, experts argue that consumers should be wary of a particular set of concerns that could further hurt their finances.
In a sigh of relief, consumer inflation decreased in October. It now stands at 3.2% from 3.7% in September, according to the Bureau of Labor Statistics’ (BLS) Consumer Price Index (CPI), released Tuesday, Nov. 14. Yet, it’s still a far cry from the Federal Reserve’s 2% target. The question now is whether there’s another 25 basis point rate hike before the end of the year.
Some experts argued that while this lower-than-expected inflation report is being cheered by investors and lessens the chance of a December rate hike, “higher for longer” is still the most likely outcome.
“So even if the Fed doesn’t raise rates further, we should be dealing with an elevated rate environment for quite a while,” said Ted Rossman, senior industry analyst at CreditCards.com. “Years, probably. Even if rates stabilize or drop a little bit in 2024, that still means credit card rates could be at or near record highs and mortgage rates could still be near their highest point in two decades.”
What does this mean for consumers?
This latest set of data was lower than anticipated and largely driven by a decrease in gasoline prices. Economists surveyed by The Wall Street Journal estimated consumer prices to increase 0.1% in October and 3.3% from a year earlier. Meanwhile, core CPI, which excludes volatile food and energy prices rose 4%, the smallest 12-month change since the period ending in September 2021 and lower than the expected 4.1%.
According to Jeffrey Rosenkranz, portfolio manager, Shelton Capital Management, eventually, this will mean some good news for consumers, as mortgages, car loans and credit card rates should eventually start to head lower.
“However, the reason for this is that the economy is slowing, which will soften the labor market and trigger a rise in unemployment,” he said, adding that if the Fed has overtightened and the economic slowdown is a hard landing, that would have the most detrimental impact on consumers over the coming quarters.
Rosenkranz noted that some of the individual categories that are pushing inflation lower are used cars, utility gas, heating oil, gasoline, dairy products, airfares and certain medical care services.
“These are purchases that everyday Americans make routinely, so the decline in prices will be a real tangible benefit for their wallets,” he said.
On the other hand, once again, the index for shelter was the largest contributor, rising 6.7% over the last year, accounting for more than 70 % of the total increase in the core CPI, the BLS said.
According to Realtor.com chief economist Danielle Hale, although inflation cooled down, shelter inflation continued, albeit being at its lowest annual gain since September 2022, 6.6%.
“Households looking to move to a new rental who haven’t moved recently are likely to be in for some sticker shock. Even though rents dipped 0.7% from a year ago in September, they’re down less than 2% from the 2022 peak and up 24% from four years ago,” Hale said, adding that even though rents are expensive, they’re still a lower-cost option than buying a starter home in all but 3 of the 50 largest metro areas.
In addition, she noted that rising home prices and mortgage rates raise the stakes for home buyers.
While inflation is cooling down, it’s still not where the Fed wants it to be, yet to put this in context, inflation stood at a whopping 7.7% in October 2022, according to BLS data.
While the chances of a hike at the Fed’s last Federal Open Market Committee (FOMC) meeting of the year in December have significantly decreased with this new inflation report, Fed officials were still very cautious as late as last week.
“Today’s CPI significantly reduces the odds of a rate hike in December. In September,” said William Luther, director of the American Institute for Economic Research’s Sound Money Project.
“Zero monthly inflation makes it much easier for Fed officials to justify changing course,” he added.
On Nov. 1 the Fed paused its interest rate hikes for the second consecutive time, following 11 increases since March 22. The decision was viewed by many as a “wait and see” approach.
And on Nov. 9, Chair Jerome Powell reiterated what he said at the FOMC press conference during remarks at an International Monetary Fund conference in Washington, D.C. — namely that the Fed is “not confident” it had achieved a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2%.
“We know that ongoing progress toward our 2% goal is not assured: Inflation has given us a few head fakes. If it becomes appropriate to tighten policy further, we will not hesitate to do so,” he said according to prepared remarks.
Moody’s Cuts U.S. Outlook
Finally, on Nov. 10, Moody’s changed the outlook U.S. credit ratings to “negative” from “stable,” citing high interest rates, continued political polarization in Congress and fiscal deficits.
“Continued political polarization within U.S. Congress raises the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability,” the ratings agency said in a statement.
In turn, Charles Williams, founder and CEO of real estate data analytics firm Percy, said thatMoody’s action makes the United States’ ability to borrow a little bit costlier, as the nation is seen as a riskier bet when it comes to global investments, and at a time of unusually high federal deficit.
“This is already driving up the cost of Treasuries, which will drive up the cost of mortgages and reduce the money Americans can spend on discretionary purchases,” said Williams.
Other experts meanwhile deem Moody’s actions “a warning shot fired toward Washington DC.”
Shelton Capital’s Rosenkranz said that while dysfunction and profligate spending are causing deficits at a time when interest rates to finance that deficit spending were going up, “history shows that fiscal deficits actually have a very low correlation with interest rates and performance for the bond markets.”
“The impact on end consumers will be negligible, as inflation and Fed policy will be the dominant drivers of rates over the coming months,” he added.
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