Overview: Over the past week, consumer spending data was much stronger than expected, which was negative for mortgage markets. Highly anticipated inflation data was a bit more elevated than investors were hoping to see as well, so rates ended the week higher.
Since consumer spending accounts for over two-thirds of U.S. economic activity, Federal Reserve officials are keeping a close eye on this data during their battle to bring down inflation. After two months of large declines, retail sales in January jumped 3% from December, far more than the consensus forecast, and the largest monthly increase since March 2021. While the gains were widespread, particular strength was seen in furniture, restaurants, bars, and vehicles.
The Consumer Price Index (CPI) is a closely watched inflation indicator that looks at price changes for a broad range of goods and services. In January, CPI was 6.4% higher than one year ago. Core CPI excludes the volatile food and energy components and provides a clearer picture of the longer-term inflation trend. Core CPI in January was up 5.6% from a year ago, slightly above the consensus forecast, but down from an annual rate of 5.7% last month. Annual inflation remains far above the readings around 2% seen early in 2021, which is the stated target level of the Fed.
Since the retail sales data is not adjusted for price changes, investors have been watching the relationship between consumer spending and inflation. If people buy the same items but the prices have increased, then their total spending has increased. In January, retail sales were 6.4% higher than a year ago, matching the annual increase in CPI inflation over that time frame. Bottom line, the month-to-month volatility for retail sales has been very high lately, but over a longer time period, the data makes sense given the inflation rate.
Retail Sales (% change)
New Residential Construction report (also known as Housing Starts)
Existing-Home Sales report
New-Home Sales report
Personal Consumption Expenditures (PCE) Price Index