This week brought encouraging news for the economy, as inflation data came in lower than expected, while consumer spending showed modest gains. These developments provided a welcome boost to mortgage markets, resulting in slightly lower mortgage rates by the week’s end.
Consumer Price Index: A Softer Inflation Trend
The Consumer Price Index (CPI), a key measure of inflation, showed signs of easing. Core CPI, which excludes volatile food and energy prices, rose by 3.2% in December compared to the same month last year. This was below expectations and marked the lowest annual rate since April 2021.
While this decline is notable—down from a peak of 6.6% in September 2022 and 3.9% in January 2024—it remains above the Federal Reserve’s 2.0% target. Persistent shelter costs, along with rising new and used car prices, continue to keep inflation elevated. The increase in car prices is likely tied to strong demand following hurricane-related damage to vehicles.
Producer Price Index Surprises to the Downside
In addition to the CPI, the Producer Price Index (PPI), which tracks the cost of goods and services for producers, provided further positive news. Core PPI remained flat in December compared to November, defying forecasts of a 0.3% increase.
While PPI data holds less influence than CPI in assessing economic trends, its performance still signals progress in the battle against inflation.
Consumer Spending and Retail Sales
Consumer spending, despite higher prices and elevated credit card rates, remained resilient during the holiday season. In December, retail sales rose 0.4% from November and were up 3.9% compared to the previous year. Categories such as furniture, automobiles, apparel, and sporting goods saw particular strength.
However, the growth in retail sales fell slightly below expectations, reflecting cautious optimism about the economy’s trajectory.
What Lies Ahead for Mortgage Markets?
As inflation shows signs of cooling, investors will focus on guidance from the Federal Reserve regarding future monetary policy. While recent data provides some relief, the Fed’s stated goal of achieving 2.0% inflation remains a distant target.
Next week’s economic calendar will be light, with Existing Home Sales scheduled for release on Friday. Markets will also pause on Monday in observance of Martin Luther King Jr. Day.
Bottom Line
The easing inflationary pressures and resilient consumer spending offer a mixed but hopeful outlook for the economy. For mortgage markets, this week’s developments brought much-needed relief, but all eyes remain on the Fed’s next steps. Borrowers and investors alike will watch closely as the battle against inflation continues.
