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                        Research and Insights
                        Forecast
                        Hot Inflation Data Likely to Delay Rate Cuts, Put Upward Pressure on Mortgage Rates
    Economic & Housing Weekly Note
Hot Inflation Data Likely to Delay Rate Cuts, Put Upward Pressure on Mortgage Rates
April 12, 2024
**Key Takeaways:**

**The Consumer Price Index (CPI)** rose 0.4 percent in March for the second consecutive month, bringing the year-over-year comparison to 3.5 percent, an acceleration of three-tenths compared to February, according to the Bureau of Labor Statistics (BLS). Energy prices rose 1.1 percent after a 2.3 percent gain the month prior, while food prices rose a muted 0.1 percent over the month. Excluding food and energy, core CPI increased 0.4 percent for the third consecutive month, leaving the annual rate unchanged at 3.8 percent. Core goods prices declined over the month but were offset by large month-over-month increases in shelter (0.4 percent), medical care services (0.6 percent), and motor vehicle insurance (2.6 percent).
	**The Producer Price Index (PPI)** increased 0.2 percent in March, pushing the year-over-year comparison up five-tenths to 2.1 percent, according to the BLS. Excluding food, energy, and trade services, core PPI rose 0.2 percent on the month, the smallest increase since November. Compared to a year ago, the core PPI was up 2.8 percent.
	**The National Federation of Independent Business (NFIB) Small Business Optimism Index** declined 0.9 points to 88.5 in March, its lowest level since 2012. The net percentage of businesses planning to increase employment declined 1 percentage point to 11, the lowest level since the onset of the pandemic. Negative 18 percent of firms expect real sales to be higher, a decline of 8 percentage points. The net share of businesses raising average selling prices jumped 7 points to 28 percent, the highest level since October. A plurality of firms (25 percent) reported inflation as their single most important problem, an increase of 2 percentage points.
	The minutes from the **Federal Open Market Committee (FOMC)** March 19-20 meeting showed that “almost all participants judged that it would be appropriate to move policy to a less restrictive stance at some point this year if the economy evolved broadly as expected.” Further, the minutes stated that slowing the pace of quantitative tightening (QT) should happen “fairly soon.” The planned structure, according to the minutes, would leave the agency MBS cap of $35 billion per month unchanged while reducing the current $60 billion cap on Treasury securities. Actual MBS runoff has averaged less than half of the set cap since QT began in mid-2022.**Forecast Impact:**

The gains in headline and core CPI were above both consensus and our expectations. The CPI has now had three consecutive readings that have come in above market expectations, suggesting that some price pressures beyond lagged shelter costs still remain. This is further supported by a sharp jump in the number of small businesses reporting price increases in March. As such, we will likely be revising upward our inflation expectations for the year. Still, the PPI came in somewhat below market expectations and suggests that the core PCE price index, which is the Fed’s preferred inflation measure, will be considerably softer than the core CPI. While that’s supportive of eventual rate cuts this year, we now see a June rate cut as increasingly unlikely given the strength in the labor market and generally hot inflation readings. The recent rise in the 10-year Treasury resulting from both the jobs report last week and the CPI report this week will also likely put upward pressure on mortgage rates above our current forecast.





Nathaniel Drake
Economic and Strategic Research Group
April 12, 2024

*Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.*

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