The falling CPI and interest rates

January 21st, 2015

With consumers saving money on everyday items and the economy improving, interest in homeownership could rise.

The U.S. Bureau of Labor Statistics has announced its Consumer Price Index, which measures what consumers pay for certain goods and services, dropped 0.4 percent in December 2014 compared to the previous month. According to Reuters, the change reflected economists’ predictions and could encourage the Federal Reserve to continue delaying an increase for the key federal funds rate.

If this is the case, interest rates can remain around historical lows. This means consumers can continue to enjoy affordable home purchase financing for some time. The news source noted many economists expect a rise in the funds rate to come before the end of the second quarter of 2015. However, an adjustment after this time appears more likely due to a host of underperforming economic factors during December 2014.

With the economy missing the mark, regulators want to ensure consumers feel confident getting a mortgage. Considering Freddie Mac reported the average interest rate for a 30-year fixed mortgage fell to 3.66 percent in the week ended Jan. 15 from 3.73 percent the previous week, current monetary policy is working to provide affordable financing to Americans. This is especially true considering the average interest rate was 4.41 percent the same time a year ago.

Evidence of invigorated mortgage activity
The connection between the economy and housing market has been evident through various lenses. Multiple reports have noted how declining fuel prices have encouraged consumers to move forward with home purchases, and increasing interest in homeownership was clear in the latest mortgage application survey from the Mortgage Bankers Association (MBA).

The MBA’s Market Composite Index, which measures total mortgage applications, went up 49.1 percent in the week ended Jan. 9 compared to the previous week. MBA Chief Economist Mike Fratantoni pointed to improvements in the economy as the cause, calling out low interest rates specifically.

“In addition to the drop in rates and news of improvement in the job market, there was additional positive news for prospective homebuyers with evidence that credit availability has increased somewhat, and with [the Federal Housing Administration]‘s announcement of a decrease in their mortgage insurance premiums,” Fratantoni said.

No deflation fears in the US
TIME Magazine noted December 2014′s CPI decline drew some caution from Wall Street, as the largest drop in six years brought some concerns regarding deflation. However, with some items on the CPI increasing during the month, TIME said conditions are not headed in the wrong direction, and consumers are happy with declining prices. These savings could continue to prompt increased interest in homeownership, as has been seen with more affordable fuel.