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Inflation Jumps

Overview: Two highly anticipated economic reports were released over the past week, and an enormous surge in inflation outweighed a major shortfall in job gains. As a result, mortgage rates ended a little higher.


A large decline in inflation last year due to the pandemic was one of the primary reasons for record-low mortgage rates. However, the latest data suggests that the trend has sharply reversed. The Consumer Price Index (CPI) is a widely followed monthly inflation report that looks at the price change for goods and services. In April, CPI was 4.2% higher than a year ago, up from 2.6% last month, and the largest annual rate of increase since September 2008. Core CPI, which excludes the volatile food and energy components, was 3% higher than a year ago, up from 1.6% last month. Since an increase in inflation reduces the current value of future cash flows, it causes bond yields to rise, which pushes mortgage rates higher.

In April, the economy gained just 266,000 jobs, which was far below the consensus forecast of 975,000. The unemployment rate rose to 6.1%, above the consensus for a decline to 5.8%. A variety of factors likely contributed to the shortfall, including a mismatch between open positions and available workers and unusually large seasonal adjustments due to the extreme impact of the pandemic on the April 2020 data. Average hourly earnings, an indicator of wage growth, were only 0.3% higher than a year ago, down from an annual rate of increase of 4.2% last month. The rapidly shifting proportion of higher paying and lower paying jobs in the U.S. has made average wage growth highly volatile in recent months.

Week Ahead

Looking ahead, investors will continue watching global COVID case counts and vaccine distribution. Beyond that, the Retail Sales report will be released on Friday. Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key indicator of growth. The New Residential Construction report (aka Housing Starts) will come out on Tuesday.


Core CPI (annual % change)



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