Overview: Investors continue to be highly focused on inflation these days, and the data released over the past week contained bad news. As a result, mortgage rates climbed to their highest levels since November.
The Personal Consumption Expenditures (PCE) Price Index is the inflation indicator favored by the Federal Reserve. In January, core PCE, which excludes the volatile food and energy components, was up 4.7% from a year ago, significantly above the consensus forecast of 4.3%. This was the highest annual rate since October 2022 and far above the Fed's target level of 2%. After declining every month since September, this data reversed the trend with a small increase from the annual rate of 4.6% seen during the prior month. Fed officials have been warning that the fight against inflation will be protracted with both ups and downs seen along the way, and the outlook for future Fed rate hikes moved higher over the past week.
Another significant economic report released this week from the Institute for Supply Management (ISM) revealed additional unwanted news on inflation. The ISM Manufacturing Index was just 47.7, and readings below 50 indicate that the sector is contracting. However, the prices paid component, an inflation indicator, unexpectedly jumped sharply to the highest level since September. The latest housing news contained a positive surprise for a change. Sales of new homes in January rose 7% from December, well above the consensus forecast, to the highest level in 10 months. The median new-home price of $427,500 was slightly lower than last January, the first year-over-year decline since August 2020.
Core PCE (annual % change)
ISM Services Index