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Inflation Prediction as of April 2023 ---- Headline Inflation Headed to 3.3% Come Midsummer

INFLATION Forecast: This is a forecast confirmation from our forecast released on March 17, 2023.


The CPI is rapidly declining and this decline will accelerate with the latest CPI data released on April 12, 2023. Annual CPI is currently 6.0% and will decline to 5.1% based on March monthly CPI coming in around 0.3% Most of the March improvement will be due to the fact that the Energy Price run-up in March 2022 monthly data point will fall out of the annual 12-month calculation March 2022 was very large due to Russian's invasion of Ukraine.


More significantly, the trend for reduced CPI will likely continue. Inflation is likely headed to just above 3% in midsummer, 2023.

 

INFLATION History: Over the past 50 years, the US has had 3 inflationary time periods and all related to Oil/Gas prices. Please note, as fast as inflation spiked, it fell off just as dramatically.


It is worth noting that mortgage rates do follow the CPI lead but there is a lag time involved. Rates tend to rocket up and feather down---no one wants to be first to lower rates in case the market decreases stall.

 

Total and Core: The annual CPI is a rolling product of 12 monthly data points. Think it as being 12 dominoes, as a new one comes on, the oldest one falls off---that is March 2022’s 1.2%


Total CPI is going to decrease through June 2023 as the older large blue bars (Mar-June 2022) are replaced with smaller blue bars. This drop in CPI will be rapid.

 

Sensitivity and projection: On April 12, 2023, the large data point of 1.2% for March 2022 will fall off. What is not known is what will March 2023 be. My best guess it will be around 0.3%. The graph on the left shows what the Annual CPI rate a range of monthly CPI’s of 0.0% to 1.0%.

 

Energy and Food: For energy, note the scale is HUGE. The large blue bar for March 2022 is the energy inflation due to Russia’s invasion of Ukraine. It will fall out of the rolling CPI calc on April 12 when the March 2023 CPI data is released and March 2022 data falls off. Food is trending down too.

 

GAS PRICES are an international item that affects all. Putin invades Ukraine 2.24.22 Gas prices were up 19% for the ONE month alone: March 2022.


The March 2022 spike will continue to be included in the annual CPI calculation for the next 2 months and will drop off on 4.12.23. The 17% June gas prices surge will fall off 7.12.23.

 

Core CPI: Core represents 77% of all CPI. Of this shelter is the largest component representing 32% of all consumer expenditures.

 

Shelter and Medical: Shelter will start trending down as repriced lease data rolls become available, but for now the annual will trend is up. Changes in this component will lag the CPI improvement but it will help moderate CPI in the months after June 2023.

 

NEW Vehicles and USED Vehicles: New car inflation will continue to decrease when April and May 2022 data rolls off, this will have a material CPI improvement. Used car prices continue to decrease as new car production and inventory replenishment continue. March 2022 is a large negative data point and it will fall off on 4.12.23. This will cause the annual to spike upward.

 

Components: Energy, Food and Core: Commodities and Services + Major Subcomponents. There are 300+ product categories that go into the CPI calc. The 23 subcategories listed below account for 92% of all the consumer expenditures that go into the CPI calc. Green arrows are 70% and are tracked monthly.

 

Below are the publication dates of the CPI, PPI and Net New Jobs---data pertains to the prior month of economic activity. These items will be key factors during the Federal Reserve’s meetings which are also listed below.

 

This was the original, hand-designed Inflation Projection through July 12, 2023. Reasonably accurate. Simple decomposition of complex problems is a good way to forecast!


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So, mortgage rate reactions to improving CPI expected this week would be...... ?

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Jeff Hulett
Jeff Hulett
Apr 11, 2023
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Hard to know. It always seems mortgage rates changes lag funding rate changes in downward moving rate environments. The spread between treasuries and mortgage has been wide. It always takes mortgage rates longer to adjust. Given lower CPI and mortgage companies are getting hammered because of lack of volume, would expect mortgage rates to drop soon. Just not sure if this week.

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