Inflation Falls

Overview: Mortgage markets were volatile again over the past week, with tariff news still dominating the headlines, yet rates ended the week with little change. The latest inflation data was lower than expected, but tariffs may exert upward pressure going forward. Consumer spending surged in March, likely boosted by consumers rushing to avoid higher prices.

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The Consumer Price Index (CPI) is one of the most closely watched inflation indicators released each month. To reduce short-term volatility and get a better sense of the underlying inflation trend, investors look at core CPI, which excludes food and energy. In March, core CPI was 2.8% higher than a year ago, well below the consensus forecast and the lowest annual rate since March 2021. Shelter (housing) costs continue to be a major obstacle to bringing inflation back down to the Federal Reserve’s target level of 2% annually. By contrast, airline fares, prescription drug costs, and used vehicle prices posted significant declines in March.

Another inflation indicator released this week, which measures costs for producers, also came in well below the expected levels. The March core Producer Price Index (PPI) fell 0.1% from February, far below the consensus forecast for an increase of 0.3%. It was 3.3% higher than a year ago, down from an annual rate of 3.4% last month. Investors tend to place less weight on PPI than on CPI, since it covers a smaller portion of the economy. Investors are wondering if this month’s good news on inflation will mark the low point in the cycle and will be watching closely to see if higher tariffs exert upward pressure on inflation levels in the future.

Consumer spending jumped in March, in an apparent rush to get ahead of potentially higher prices due to new tariffs. Retail sales rose 1.4% from February, close to expectations and the largest monthly increase since January 2023. With the latest gains, sales were a solid 4.6% higher than a year ago. Motor vehicle and parts dealers reported a massive increase of 5.3% from last month. Strength was also seen in hobbies/sporting goods, building materials, and bars/restaurants.

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Core CPI (annual % change)

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Week Ahead

April 17

New Residential Construction report (also known as Housing Starts)

Mortgage markets close early.

April 18

Mortgage markets closed for Good Friday.

April 23

New-Home Sales report

April 24

Existing-Home Sales report