Should Borrowers Worry About The Recent CPI Data? Here Are Facts

You probably heard about the recently released CPI data and wondered whether your $100 bill could buy you a few groceries items, pay for a movie ticket or buy lunch for you and your friends at a fairly nice restaurant. You’re not alone! A similar situation could be facing many Americans coming hot on the heels of just released CPI data.

CPI is an acronym for Consumer Price Index, which is the critical inflation rate parameter. The U.S. and global inflation have been on a rollercoaster this year, with rates increasing month on end. There seems to be no end in sight as the year ends. In this discussion, we look at the current CPI data, its effect on the market and why borrowers should get worried. Keep reading.

What Is The CPI Index

As noted, the CPI is the primary measure of inflation and estimates consumers' purchasing power. It tracks inflation and is based on goods and services purchased in the country over a period of time.

This key data is released by the Bureau of Labor Statistics (BLS) every month and compares prices change within 12 months. The most recent release on October 13, 2022, was for September 2022 and reveals an increase in consumer prices by 0.4%. On the same note, the CPI rose 8.2% over 12 months. Therefore this means that the things you purchased in August 2021 could have increased by 8.2% in August 2022.

The CPI basket of goods includes things Americans purchase the most. It's then compared to the previous cost and multiplied by 100 to arrive at a percentage.

Implication of The CPI

According to the BLS, the CPI climbed 0.4% more than the Dow Jones estimate, which rose by 0.3%. The last time the CPI hovered around the highest levels was in the early 80s. Other than energy prices and volatile food, the core CPI accelerated at 0.6% against the Dow Jones estimate for a 0.4% rise. The core inflation climbed by 6.6% for a 12-month period which is the highest since 1982.

The financial market was rattled by the CPI data increase, with treasury yield climbing and stock market futures taking a plunge. Along with the aggressive rate hikes by the FED, investors are watching closely how this will affect the market.

The food market climbed by 0.8% in September but increased by 11.2% from 12 months ago. Nonetheless, this could offset a 2.1% drop in the price of energy products, including a 4.9 decline in gasoline.

The latest AAA report reveals that rising crude oil prices and a tightening supply have forced pump prices to climb. As of September, oil prices range between $87 to $93 for every barrel. Thus, a drop in demand could slow down the price increases. Other increases were noted in transportation, which climbed 1.9%, and health services rose 1% in September.

The big bumps in costs are not good news for Americans, mainly because the average hourly income dropped 0.1% as per the BLS release.

Should Borrowers Worry About Price Hikes?

The Fed, or the Central Bank, is America's economic powerhouse whose role includes managing the money supply, regulating financial markets and setting interest rates. Its mandate is to mainly control the country's inflation rate through interest rate adjustments. The Fed has been aggressive this year in getting inflation under control. Typically raising the reference rate sets a spiral effect on the economy, affecting other financial contracts such as bank overdrafts, auto loans, credit cards and mortgages.

Policymakers are watching closely how increases in interest rates could affect consumers. Since March this year, the Fed has raised the benchmark interest rate by three percentage points. The release of the CPI data is likely to trigger a fourth 0.75 basis points during its November meeting. Going by the recent price hike, there's also a probability that there might be a fifth-rate hike.

CPI and Interest Rates On Loans

CPI could have an impact on the interest rates on credit you may want to apply. It also drives the rates for government-issued bonds and treasury bills. When consumers have a lot of dollars in their pockets, there's likely to be an increase in demand, fueling price hikes. Historically CPI is an important indicator, and even though the unemployment data has been stubbornly low this year, the cost of borrowing might as well go up.

If you have a long-term loan, this is likely to affect your total cost of borrowing if the credit facility is a variable-rate loan. Typically, macroeconomic policies such as inflation affect these types of loans. The interest rates will likely go up when the Fed increases the benchmark rate.

Mortgage Rates Rising

The Fed's aggressive policy has weakened the mortgage industry considerably. Freddie Mac's mortgage market survey data show that the 30-year fixed-rate mortgages rose to 6.29% in late September. Just twelve months ago, the mortgage rates were 2.88%. If the inflation rates stay at lofty levels, the mortgage rates could continue sailing past the 6% mark.

Ultimately, as inflation rates remain high, the housing industry may face some headwinds, and home sales could decline. Other types of credit, such as simple online loans, credit cards and auto loans, could follow the same trend.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes