Overview: While the latest inflation data was on target, other major economic reports released over the past week suggested that economic growth remains unexpectedly strong, even though the Federal Reserve has been rapidly tightening monetary policy since the start of 2022. As a result, mortgage rates reached the highest levels of the year.
Consumer spending accounts for over two-thirds of U.S. economic activity, so retail sales data is a closely watched measure of the economy’s health. Despite higher prices, a strong labor market has helped maintain surprisingly high levels of spending. In July, retail sales jumped 0.7% from June, well above the consensus forecast for an increase of 0.4% and the largest monthly increase since January. Looking at the details, sporting goods stores and restaurants posted strong gains, while spending on furniture and appliances dropped sharply in July.
The Consumer Price Index (CPI) is one of the most widely followed inflation indicators. To reduce short-term volatility in the reading and get a better sense of the underlying trend, investors and Fed officials often prefer to look at core CPI, which excludes the food and energy components. In July, core CPI was 4.7% higher than a year ago, matching expectations and down from 4.8% last month. This was the smallest annual rate of increase since October 2021. The core CPI annual rate has fallen from a peak of 6.6% in September 2022, but it remains far above the readings around 2% seen early in 2021, which is the stated target level of the Fed.
The minutes from the July 26 Fed meeting released on Wednesday contained no significant surprises and caused little reaction for mortgage markets. There was no additional guidance on whether there will be another increase in the federal funds rate at the next meeting on September 20. In fact, the minutes emphasized the desire of officials to keep their options open so that they will be free to make this decision based on incoming economic data. Some officials stressed that progress in bringing down inflation was too slow, especially since the labor market remains “tight.” Others, however, focused on the already enormous increase in the federal funds rate and the long lags involved in its effects on the economy.
Retail Sales (% change)
August 22 — Existing-Home Sales report
August 23 — New-Home Sales report