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Inflation Climbs, Consumer Spending Surges

Overview: It was a quiet week for mortgage markets. The strong economic growth and inflation data released this week was mostly in line with expectations, and mortgage rates ended the week with little change.


A large decline in inflation last year due to the pandemic was one of the primary reasons for record-low mortgage rates. However, investors are now concerned that inflation may be heading much higher, particularly after seeing the latest data. The core Personal Consumption Expenditures (PCE) Price Index is the inflation measure favored by the Federal Reserve. In March, core PCE was 1.8% higher than a year ago, matching the consensus forecast, but up from an annual rate of increase of just 1.4% last month. Fed officials recently have been saying that they expect that higher inflation will be transitory, but some investors are worried that it may remain elevated for quite a while. The actual outcome will be a major influence on mortgage rates this year. Gross Domestic Product (GDP) is the broadest measure of economic activity. During the first quarter, GDP rose at an annualized rate of 6.4%, which was very close to the consensus forecast. This was the second-best reading since 2003, behind only the third quarter of last year. Consumer spending surged during the quarter, boosted in part by the rollout of the vaccine and the distribution of stimulus checks.

While it unexpectedly weakened a bit this month, activity in the services sector remained close to record levels. The Institute for Supply Management (ISM) Services Index fell to 62.7, below the consensus forecast of 64. The service sector accounts for more than 75% of U.S. economic activity, and readings above 50 indicate that it is expanding.

Week Ahead

Looking ahead, investors will continue watching global COVID case counts and vaccine distribution. Beyond that, the monthly Employment Report will be released on Friday, providing key figures on the number of jobs, the unemployment rate, and wage inflation. The Consumer Price Index (CPI) will come out on May 12. CPI is a widely followed monthly inflation report that looks at the price change for goods and services.


Core PCE (annual % change)



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