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Inflation Overshoots Forecasts

Economic Observer: Up-to-date information on the latest financial news

Overview: It’s been a tough month for mortgage markets so far. Last week, the closely watched report on job growth and wage gains vastly exceeded the forecasts from economists. The culprit this week was key inflation data that was higher than expected. As a result, mortgage rates again moved higher.


The Consumer Price Index (CPI) is one of the most widely followed inflation indicators. To reduce short-term volatility and get a better sense of the underlying inflation trend, investors often look at core CPI, which excludes the food and energy components. In January, core CPI rose 0.4% from December, above the consensus forecast of 0.3%. This was 3.9% higher than a year ago, the same annual rate as last month.


While the core CPI annual rate has fallen from a peak of 6.6% in September 2022, it remains far above the readings around 2% seen early in 2021, which is the stated target level of the Federal Reserve. Progress in the battle against inflation has been slow due to stubbornly high prices in certain areas. Shelter (housing) costs remained elevated and again were responsible for the largest portion of the increase, but they are expected to slowly ease this year. Other categories with large monthly increases included airline fares, food, and auto insurance, while used-vehicle prices and apparel costs posted declines. Due to the CPI report, the anticipated timing for the first federal funds rate cut by the Fed moved out from May to June.


Higher rates have slammed the brakes on the surge in applications for home refinancing since the start of the year, according to the latest data from the Mortgage Bankers Association (MBA). After several weeks of gains, applications to refinance dropped 2% from last week. Purchase applications fell 3% from the prior week and were down 12% from last year at this time.


Core CPI (annual % change)

Chart of Core CPI from May 2023 to January 2024


Week Ahead

Feb. 15

Retail Sales report

Feb. 16

New Residential Construction report (also known as Housing Starts)

Feb. 19

Mortgage markets closed for Presidents' Day

Feb. 22

Existing-Home Sales report


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