Inflation Creeps Up

The focus this week was on the inflation data, and it was a bit stronger than expected. As a result, mortgage rates ended the week higher.

Although this annual rate is down significantly from a peak of 6.6% in September 2022, it is still far above the readings around 2.0% seen early in 2021, which is the stated target level of the Fed. Shelter (housing) costs were 4.9% higher than a year ago and continued to be a primary reason why inflation remains stubbornly elevated. Other categories which posted large monthly increases included apparel, used car prices, and medical care services.

Another significant inflation indicator released this week which measures costs for producers was essentially in line with the consensus forecast. The core Producer Price Index (PPI) was 2.8% higher than a year ago, up from an annual rate of 2.4% last month. Of the two major inflation reports, investors tend to place less weight on PPI, since it reflects a smaller slice of the economy than CPI.

The detailed minutes released on Wednesday from the last Fed meeting on September 18 revealed an intense debate about the decision to cut the federal funds rate by 50 basis points rather than 25 basis points. The statement released after the meeting indicated that 11 of the 12 voting officials supported the decision, while just one dissented. The minutes, however, suggested that there was a little more disagreement during the debate. According to the minutes, "some" participants supported a smaller 25 basis point reduction to provide more time to evaluate the shifting economic outlook. 

Investors will continue to look for Fed officials to elaborate on their plans for future monetary policy and will closely monitor the situation in the Middle East. For economic reports, Import Prices will be released on Wednesday. Retail Sales will come out on Thursday. Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key measure of the health of the economy. Housing Starts will be released on Friday. Mortgage markets will be closed on Monday in observance of Columbus Day.