Overview: Over the past week, the major economic data was weaker than expected. Inflation and consumer spending fell short of the forecasts of leading economists, and as a result, mortgage rates ended the week a little lower.
The Consumer Price Index (CPI) is one of the most widely followed inflation indicators. In April, CPI rose 0.3% from February, below the consensus forecast of 0.4%, and stands 3.4% higher than a year ago. To reduce short-term volatility and get a better sense of the underlying inflation trend, investors typically look at core CPI, which excludes the food and energy components. Core CPI was 3.6% higher than a year ago, down from 3.8% last month, and the lowest annual rate of increase since April 2021.
Although the core CPI annual rate has fallen from a peak of 6.6% in September 2022, it is still far above the readings around 2% seen early in 2021, which is the Federal Reserve’s target level. Shelter (housing) costs remained elevated and again were responsible for a large portion of the increase. Other categories with large monthly increases included apparel, transportation services, and medical care. By contrast, used and new vehicle prices posted nice declines in April. Following this inflation data, investors view September as the most likely time for the first rate cut by the Fed since 2020.
Despite higher prices and borrowing rates, a strong labor market has helped maintain consumer spending at surprisingly high levels for the last couple of years. However, the data released earlier in the month indicated looser labor market conditions, and this week revealed some pullback in consumer spending. In April, retail sales were flat from March, far below the consensus forecast for an increase of 0.4%, and the results for the prior month were revised downward as well. Weakness was seen in several categories including online merchants, sporting goods stores, and vehicle dealers.
Core CPI (annual % change)
Week Ahead
May 16
New Residential Construction report (also known as Housing Starts)
May 22
Fed meeting minutes release
Existing-Home Sales report
May 23
New-Home Sales report
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