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Inflation Remains High

Overview: Over the past week, the economic news was mixed for mortgage markets, and none of it caused much reaction. The inflation data was more encouraging in Europe than in the United States. Mortgage rates ended the week slightly lower.


The Personal Consumption Expenditures (PCE) Price Index is the inflation indicator favored by the Federal Reserve. In April, core PCE, which excludes food and energy to reduce volatility, was up 4.7% from a year ago, a little above the consensus forecast, and up from an annual rate of 4.6% last month. Despite substantial monetary policy tightening, the annual rate of increase in core PCE remains far above the Fed's target level of 2%, and progress on bringing down inflation has stalled. Core PCE is still increasing at the same annual rate of 4.7% seen in November.

The latest inflation data in Europe contained more promising news. The May consumer price index in Germany dropped to an annual rate of 5.7

%, down from 6.8% in April. French consumer price inflation fell to an annual rate of 6%, the lowest level in a year. As a result of the contrasting reports in Europe and the U.S., expectations for rate hikes in Europe fell this week, while they rose in the U.S. Investors are now roughly evenly split about whether there will be an increase in the federal funds rate at the next Fed meeting on June 14.

The Job Openings and Labor Turnover Survey (JOLTS) report measures job openings and labor turnover rates, and the latest data indicates that the labor market remains very tight. At the end of April, there were an enormous 10.1 million job openings, well above the consensus forecast and over three million more than in January 2020 prior to the pandemic. A high level of openings reflects a strong labor market, as companies struggle to hire enough workers with the necessary skills.


Core PCE (annual % change)

Week Ahead

Looking ahead, investors will watch the outcome of the debt ceiling votes, signs of problems in additional banks or other areas of the financial system, and comments from Fed officials on the outlook for future monetary policy. For economic reports, the Institute for Supply Management (ISM) Manufacturing Index will come out on June 1. The monthly Employment Report will be released on June 2, and these figures on the number of jobs, the unemployment rate, and wage inflation will be some of the most highly anticipated economic data of the month. The Institute for Supply Management (ISM) Services Index will come out on June 6.


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