Inflation Slows

During a light week for economic news, investors focused their attention on the CPI inflation data on Thursday. This report contained no surprises, however, and mortgage rates ended the week a little lower. 

Helping the figures come in below the expected levels, used car prices dropped 2.5% in December. While still up sharply from a year ago, airline fares also showed a steep monthly decline. Shelter (housing) costs, which account for roughly one-third of the CPI index, continued to post significant gains in December, but this component generally operates with a lag. Current indicators of shelter costs such as newly signed rental agreements suggest that this area will provide downward pressure on overall inflation readings in coming months.

Inflation remains far above the readings around 2.0% seen early in 2021, which is the stated target level of the Fed. To help reduce inflationary pressures and reach this goal, the Fed plans to raise the federal funds rate a little more at future meetings. Both Fed officials and investors anticipate the peak in rates to be reached soon, but their outlooks then diverge. Nearly all officials have stated that rates will be held steady at their peak level through the end of 2023, while investors anticipate that slower economic growth will force the Fed to begin cutting rates later in the year. 

Investors will continue to look for Fed guidance on the magnitude of future rate hikes and bond portfolio reduction. Retail Sales will be released on Wednesday. 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 come out on Thursday and Existing Home Sales on Friday. Mortgage markets will be closed on Monday in observance of MLK Day.