By Ryan Casey Stephens, FPQP®
Special Contributor
Each week in December we’ll take a deep dive into one report that moves markets and impacts mortgage rates.
Have you been paying more for groceries? Does the price of Christmas sweaters have you feeling like the Grinch? Are you traveling for the holidays and can’t believe how much you’ll spend on fuel? Even if you stay home, your rent or mortgage is likely much higher than a year or two ago.
We’re living through the most inflationary economy in four decades, and 2022 is sure to go down in the history books. In order to track the trouble, we need solid data, and that’s where this week’s report comes into play.
The Consumer Price Index or CPI is the inflation report that most closely follows the inflation “you feel.” While it’s not the Fed’s favorite, it’s probably the most closely watched of the big inflation measures. We’re going to get a fresh reading of this data this week right before the Fed’s decision to raise rates, so let’s examine it in this week’s Three Things to Know.
Not Just About Fed Rate Hikes
Right off the bat, you should know that this report doesn’t exist solely for the Fed’s use. The data inside has long been used to annually adjust things that affect most Americans — tax brackets, social security benefits, and food stamp recipients.
It’s no secret that Personal Consumption Expenditures or PCE has long been the Fed’s favorite measure, but it’s fair to say they’ve been paying much more attention to the CPI this year than in prior years. Inflation has become so extreme that the Federal Reserve needs to wrap its head around much more than its favorite report. So that leads to the question, what is the CPI report and how does it differ from PCE?
Eight Major Categories
The CPI report doesn’t follow inflation across every facet of the economy. Instead, it focuses on eight major categories that Americans tend to feel the most on a month-over-month basis. These currently include housing, apparel, transportation, recreation, medical care, food and beverages, education, and other goods and services.
The categories are also weighted in importance, with housing, food and beverages, and transportation carrying the most weight. Did you notice in the previous paragraph I said, “these currently include …”? The categories included in the CPI report are re-evaluated and changed every two years, while the categories in the Fed-preferred PCE can change month to month.
On the one hand, you might argue that CPI is a better measure because it tracks the same categories for a longer period, yielding more data points. On the other hand, the PCE can track our spending trends by suddenly including something more Americans have decided to buy.
How is The Data Collected?
The Bureau of Labor Statistics creates the report by using actual human ‘price-checkers’. More than 450 of these shoppers hit the road every month to track the price of more than 100,000 goods and services and 8,000 housing units. It’s also good to note that the report tends to favor the urban consumer paying out of pocket for these items – they don’t include Medicare, Medicaid, or employer-sponsored healthcare plans, for example.
Final Thoughts
The consensus on this month’s data is the year-over-year CPI inflation is going to come in flat, while month-over-month is predicted to show a slight increase. The Fed will receive the data tomorrow as they meet to decide on the last rate hike of the year. Most experts think the Fed is going to raise the rate one-half point, but a quarter of experts surveyed believe there’s a chance of another three-quarter point hike.
These reports track a matter of grave importance. Our buying power and ability to stay on top of living expenses play a large role in keeping our nation strong. Inflation is, without doubt, the greatest economic adversary we face as we move into the next year. If the current CPI inflation of 7.7 percent were to persist, today’s $100 bill would be worth $188 in 2024.
Ryan Casey Stephens FPQP® is a mortgage banker with Watermark Capital. You can reach him at [email protected].
