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Inflation Surges

Overview: Mortgage rates steadily declined following the November 3 Federal Reserve meeting, but they abruptly reversed direction after the latest inflation data was released Wednesday morning. Altogether, rates ended the week a little lower.


A tight labor market, strong consumer demand for goods, rising energy prices, and supply chain disruptions are some of the main factors that have caused inflation to increase this year to the highest levels in decades. The Consumer Price Index (CPI) is a closely watched inflation indicator that looks at price changes for a broad range of goods and services. In October, core CPI, which excludes the volatile food and energy components, was 4.6% higher than a year ago, up from an annual rate of increase of 4% last month, and the highest level since 1991. Readings for core CPI were below 2% during the first three months of the year.

Fed officials and economists have been divided about whether the recent spike in the annual inflation rate is mostly due to temporary factors caused by the pandemic or will last for a long time. However, even the more optimistic analysts now concede that higher inflation will stick around for much longer than they had originally anticipated. Investors expect that the Fed will begin raising the federal funds rate sooner as well, with the first rate hike likely coming in July.

After a couple of months of disappointing results, the highly-anticipated Employment Report released on Friday exceeded expectations. In October, the economy gained 531,000 jobs, above the consensus forecast of 450,000, and revisions added 235,000 jobs to the results for prior months. The gains were broad-based across a wide range of industries, with particular strength in the manufacturing, leisure, and hospitality sectors. The economy is still recovering from the pandemic and now has about 4.2 million fewer jobs than in February 2020.

The unemployment rate declined from 4.8% to 4.6% in September, which was below the consensus forecast. Average hourly earnings were an impressive 4.9% higher than a year ago, up from 4.6% last month, and the highest level since February. Historically, wage growth averages around just 2.5% annually. Investors are watching closely to see how much rising pay for employees feeds through to the overall level of inflation in the economy.


Core CPI (annual % change)

Week Ahead

November 11 — Mortgage markets closed in observance of Veterans Day

November 16 — Retail Sales report

November 17 — New Residential Construction report (aka Housing Starts)



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