| 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 May, Core CPI rose just 0.1% from April, far below the consensus for an increase of 0.3%. It was 2.8% higher than a year ago, remaining at the lowest annual rate since March 2021.
Although this annual rate has dropped sharply from a peak of 6.6% in September 2022, and from 3.9% in January of last 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 progress on bringing down inflation remains challenging. By contrast, used vehicles, new vehicles, and apparel posted notable price declines in May.
Another significant inflation indicator released this week, which measures costs for producers, also came in below the expected levels. The May core Producer Price Index (PPI) rose 0.1% from April, well below the consensus forecast for an increase of 0.3%. It was 3.0% higher than a year ago, down from an annual rate of 3.1% 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. Going forward, investors will be watching closely to see if higher tariffs exert upward pressure on inflation levels.
Israeli airstrikes on Iran and retaliatory attacks by Iran had little net impact on mortgage rates this week due to offsetting influences. During periods of uncertainty, investors generally shift to relatively safer assets such as bonds, which is positive for mortgage rates. However, conflict in the Middle East causes oil prices to rise, increasing future inflationary pressures, which is negative. |
