Market Perspective

Elevated Inflation


Overview: It was a volatile week for mortgage markets, as investors evaluated comments from a series of Federal Reserve officials. In the end, though, officials expressed a wide range of views, and little new information was provided on the timing of future policy changes. The major economic data contained no significant surprises, and mortgage rates ended the week a bit lower.

 

As the economic recovery has progressed, Fed officials have repeatedly said that the need for the stimulative bond purchases initiated near the start of the pandemic has declined, but they have not provided a specific timeline for making policy changes. Many officials have recently expressed support for the tightening of monetary policy very soon, given the elevated levels of inflation. At a highly anticipated speech on Friday, however, Fed Chair Jerome Powell emphasized the "near-term risk" to the economy posed by the spread of COVID. He said that he would like to see further improvement in the labor market before removing stimulus. He once again laid out the reasons that the recent surge in inflation likely could be transitory due to temporary factors related to the pandemic. As a result, investors are still waiting to find out when the Fed will begin tapering its bond purchases. As expected, the latest inflation readings remained very high. In July, the core Personal Consumption Expenditures (PCE) Price Index, which excludes the volatile food and energy components, was 3.6% higher than a year ago. This was the same annual rate of increase as last month and the highest annual rate since 1991. While economists have been anticipating readings of this magnitude during the reopening of the economy, they also have differing views on whether higher inflation will be a temporary spike or persist for years.


Another significant economic report released this week from the Institute of Supply Management (ISM) also remained at very strong levels, as expected. The ISM Manufacturing Index came in at 59.5, and readings above 50 indicate that the sector is expanding. Of note, a large number of companies reported difficulties in hiring enough workers to keep up with growing demand.


Week Ahead

Looking ahead, investors will monitor comments from Fed officials for hints about the timing of future monetary policy changes and will track COVID case counts globally. Beyond that, the Employment Report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. The ISM Services Index also will come out on Friday.

 

Core PCE (annual % change)