Stubborn Inflation 

Investors were focused on the inflation data this week. The latest results were essentially in line with expectations, but mortgage rates moved higher.

Although this annual rate is down significantly from a peak of 6.6% in September 2022, and from 3.9% in January of this year, 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 continue to be a primary reason why inflation remains stubbornly elevated. Other categories which posted large monthly increases included new and used car prices, but this was likely due to high demand for vehicles to replace those damaged by hurricanes. 

Another significant inflation indicator released this week which measures costs for producers also was essentially in line with the consensus forecast. The core Producer Price Index (PPI) was 3.4% higher than a year ago, up from an annual rate of 3.1% last month and the highest level since February 2023. 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.

On Thursday, the European Central Bank (ECB) reduced benchmark interest rates by another 25 basis points to 3.00%, as expected, marking its fourth cut this year. The statement released after the meeting again emphasized that future monetary policy decisions will be based on incoming economic data, while providing no specific guidance. According to the statement, the battle against inflation is "well on track" and officials expect to reach their target level next year. Investors anticipate that there will be several more 25 basis point rate cuts by the ECB next year.

The next Fed meeting will take place on Wednesday. Investors anticipate a 25 basis point reduction in the federal funds rate and will look for additional guidance on future monetary policy. For economic reports, Retail Sales will come out on Tuesday. 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 Wednesday and Existing Home Sales on Thursday. Personal Income and the PCE price index, the inflation indicator favored by the Fed, will come out on Friday.