Overview: The key economic data released over the past week was stronger than expected. This included major reports on both inflation and the labor market. As a result, mortgage rates ended the week higher.
The Consumer Price Index (CPI) is one of the most closely watched inflation indicators released each month. To reduce short-term volatility and get a better sense of the underlying inflation trend, investors look at core CPI, which excludes food and energy. In January, core CPI was 3.3% higher than a year ago, above the consensus forecast and the highest annual rate since May 2024. Although this annual rate is down significantly 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 stated target level of the Federal Reserve. Shelter (housing) costs were 4.6% higher than a year ago and continue to be a primary reason why inflation remains stubbornly elevated.
The monthly Employment Report released on Friday exceeded expectations in nearly every major category. The economy gained 143,000 jobs in January, below the consensus forecast of 170,000. However, revisions to the results for prior months added a massive 100,000 jobs, more than offsetting the shortfall. The strongest sectors included retail, health care, and government. In addition, the unemployment rate unexpectedly dropped from 4.1% to 4%. Average hourly earnings, an indicator of wage growth, were 4.1% higher than a year ago, above the consensus forecast for an annual rate of 3.9%.
In his semi-annual testimony to Congress this week, Fed Chair Jerome Powell asserted that officials remain committed to bringing down inflation and signaled that they aren’t in a rush to further reduce the federal funds rate. Powell described the economy as “strong overall” with a “solid” labor market. He explained that keeping monetary policy too tight risks “unduly” weakening economic activity, while lowering rates too soon could disrupt progress on inflation. His testimony reinforced the Fed’s position that future policy decisions will be based on incoming economic data.
Core CPI (annual % change)
Week Ahead
Feb. 14
Retail Sales report
Feb. 17
Markets closed in observance of Presidents’ Day
Feb. 18
New Residential Construction report (also known as Housing Starts)
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