Inflation Eases

Raleigh Mortgage GroupUncategorized

The latest inflation data was lower than expected, which was great news for mortgage markets. The message from the Fed meeting was less favorable, but its impact was minor. As a result, mortgage rates declined again last week.

The Consumer Price Index (CPI) is one of the most widely followed inflation indicators. To reduce short-term volatility and get a better sense of the underlying inflation trend, investors typically look at core CPI, which excludes the food and energy components. In May, Core CPI was 3.4% higher than a year ago, down from 3.6% last month, and the lowest annual rate of increase since April 2021.

Although this annual rate has fallen from a peak of 6.6% in September 2022, it is still far above the readings around 2.0% seen early in 2021, which is the stated target level of the Fed. One big reason is that shelter (housing) costs remain elevated and again were responsible for the largest portion of the increase. However, the CPI data measures shelter costs with a lag, and more timely indicators from other sources suggest that this component will slowly come down later in the year. Beyond shelter, monthly declines were seen in many areas including new vehicle prices, apparel, airline fares, and auto insurance.

Another major inflation indicator released this week which measures costs for producers also was lower than expected. The core Producer Price Index (PPI) was 2.3% higher than a year ago, down from an annual rate of 2.4% last month, and well below the consensus forecast. 

As expected, there was no change in the federal funds rate on Wednesday, and the Fed meeting statement was very similar to the prior one. Investors were mostly focused on the “dot plot” forecasts, which were more hawkish (in favor of tighter monetary policy) than expected. Officials project that there will be just one 25 basis point rate cut this year, down from three in the last set of dot plots released in March. Officials also raised their estimate of the long-run level for the federal funds rate to 2.8% from 2.6%. Despite this outlook from the Fed, most investors still anticipate that there will be two rate cuts this year and that the first will take place in September. 

Mortgage applications have benefited from the recent decline in rates. According to the latest data from the Mortgage Bankers Association (MBA), applications to refinance jumped 28% from last week and also were 28% higher than one year ago. Purchase applications rose 9% from the prior week but still were down 12% from last year at this time.

Investors will continue to watch for Fed officials to elaborate on their plans for future monetary policy. For economic reports, Retail Sales will be released on Tuesday. Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key measure of the health of the economy. Housing Starts will come out on Thursday and Existing Home Sales on Friday. Mortgage markets will be closed on Wednesday for Juneteenth. 

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