Hot inflation report increases odds of October rate hike
Rising fuel costs drove up consumer prices, which are outpacing wage growth. That puts prospective homebuyers in a tough spot as mortgage rates remain at 7.5%.
Mortgage rates ticked up in response to today's hotter-than-expected inflation numbers, and the Federal Reserve now faces more pressure to raise short-term interest rates later this month.
The average daily 30-year rate jumped from 7.46% to 7.56% following the release of September's consumer price index (CPI), according to Mortgage News Daily, before settling back to 7.5% by the mid-afternoon trading session.
CPI comes in above expectation: The 3.7% annual rise in consumer prices last month was slightly above analyst forecasts of 3.6% and up from August, when headline inflation came in at 3.4%. Both the monthly and annual increases in core inflation were also higher than analysts expected.
That's likely due to the outsized impact of one key sector: energy. The Iran war pushed overall energy prices up more than 20% in September, with gasoline seeing a 34% year-over-year increase and fuel oil up a staggering 72%, according to data from the Bureau of Labor Statistics. Beyond the energy sector, airfares, hospital services and food saw the biggest price jumps.
The inflation rate also continues to outpace wage growth, which was 3% in September. That marks six consecutive months of year-over-year declines in real earnings.
Fed rate hike may come sooner: Rising energy prices appear to be spilling over into core items, according to Sam Williamson, senior economist at First American, and that's changing the overall economic picture.
"Before the [CPI] report, markets largely expected the central bank to wait until December for its next rate hike, following its first increase in three years last month," Williamson said.
"With both headline and core inflation exceeding forecasts, policymakers may instead move that hike forward to October. Another hike in December also remains possible, though the Fed's next move will depend on incoming economic data," Williamson noted.
The CME Group's FedWatch tool still puts the odds of an October rate hike at just 37%, but that's a significant jump from 22% the day before.
"We are in 'when' not 'if' territory when it comes to the next Fed rate increase," said Jake Krimmel, senior economist at Realtor.com. The Federal Reserve next meets on Oct. 27-28.
Impacts on the real estate market: The combination of higher inflation, declines in household earnings and mortgage rates above 7.5% will continue to put a strain on would-be buyers "pushing meaningful affordability relief further out," Williamson said.