Market Perspective

Inflation Surges


Overview: Over the past week, the major economic data revealed that both wage increases and overall inflation rose slightly more than expected. As a result, mortgage rates ended a bit higher.

The Consumer Price Index (CPI) is a closely watched inflation indicator that looks at price changes for a broad range of goods and services. Core CPI excludes the volatile food and energy components and provides a clearer picture of the longer-term trend. In December, core CPI was 5.5% higher than a year ago, up from an annual rate of increase of 4.9% last month, and the highest level since 1991. For comparison, these readings were below 2% during the first three months of 2021. There are many reasons why the annual core inflation rate has surged in recent months, including a tight labor market, strong consumer demand for goods, rising energy prices, and supply chain disruptions. Component shortages have caused enormous cost increases on many items (such as car prices), and transportation issues have delayed the movement of goods around the world. Federal Reserve officials and economists are divided about how much the recent spike in inflation is due to temporary factors caused by the pandemic or reflect more permanent structural changes.

The closely watched Employment Report released on Friday revealed mixed results. The economy gained just 199,000 jobs in December, below the consensus forecast of 420,000, but revisions added 141,000 jobs to the figures for prior months. Strength was seen across a wide range of industries, especially in the leisure and hospitality sectors. The unemployment rate declined from 4.2% to 3.9%, below the consensus forecast of 4.1%, and the lowest level since February 2020. Average hourly earnings were a solid 4.7% higher than a year ago, slightly exceeding expectations, as employers competed to attract and retain workers.

Core CPI (annual % change)


Week Ahead

January 14 — Retail Sales report

January 19 — New Residential Construction report (aka Housing Starts)

January 20 — Existing-Home Sales report