Market Perspective

Inflation Picks Up


Overview: Investors were focused on inflation data over the past week. Although the reports revealed a substantial increase, mortgage rates ended the week a little lower.

The partial shutdown of the economy a year ago caused a decline in inflation, which was one of the primary factors behind the record-low mortgage rates seen in 2020. However, this trend now may be reversing, and concerns about rising inflation have caused rates to increase this year. As the vaccine rollout progresses and the economy reopens, pent-up demand in areas such as travel may be unleashed, causing prices to spike.


The latest figures released this week revealed that inflation has climbed, yet it remains relatively low. The Consumer Price Index (CPI) is a widely followed monthly inflation report that looks at the price change for goods and services. To get a better sense of the underlying trend, investors generally prefer to look at the core rate, which excludes the volatile food and energy components. In March, Core CPI was 1.6% higher than a year ago, which was a little higher than expected. It was up from an annual rate of increase of just 1.3% last month, but still well below the 2.3% increase seen in February 2020.


Investors are divided about the outlook for future inflation. Some are concerned that it may increase significantly later in the year, while others think that the perceived risks are somewhat overblown. Many investors and Federal Reserve officials anticipate that inflation likely will climb quite a bit, but that it will be just a temporary effect due to the uneven reopening of the economy. Their view is that as companies adjust, the imbalances will be corrected, and inflation will stabilize at moderate levels. In any case, investors will continue keeping a close eye on incoming data, and it will heavily influence mortgage rates.


Week Ahead


Looking ahead, investors will continue watching COVID case counts and vaccine distribution. Beyond that, the Retail Sales report will be released on Thursday. Since consumer spending accounts for over two-thirds of all economic activity in the U.S., the retail sales data is a key indicator of growth. The New Residential Construction report (also known as Housing Starts) will come out on Friday, and the Existing-Home Sales report will be released on April 22.

Core CPI (annual % change)


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