Higher Inflation

Rising oil prices were negative for mortgage markets this week, and the latest inflation reports reflected the impact of higher energy prices. As a result, mortgage rates climbed to their highest levels of the year. 

The Consumer Price Index (CPI) is one of the most closely watched inflation indicators released each month, and investors were prepared for the effects of sharply higher oil prices. In April, CPI jumped 0.6% from March, matching expectations. CPI was 3.8% higher than a year ago, up substantially from an annual rate of 3.3% last month and the highest level since May 2023. Sensitive to fuel prices, airline fares were an enormous 21% higher than a year ago. Also notable, the annual increase in average hourly earnings in April was 3.6%, meaning that wage gains are no longer keeping up with the inflation rate.

A different inflation report released this week, which measures wholesale costs for producers, also reflected the rise in energy prices. The April Producer Price Index (PPI) rose a shocking 1.4% from March, far above the consensus forecast for an increase of 0.5% and the largest monthly gain since March 2022. PPI was 6.0% higher than a year ago, up sharply from an annual rate of 4.0% the prior month and the highest level since December 2022. Its impact was relatively minor, however, as investors tend to place a lot more weight each month on the Consumer Price Index report, which better reflects overall inflation levels in the economy.

Consumer spending accounts for over two-thirds of U.S. economic activity, so the monthly Retail Sales report is a key measure of the health of the economy. While economists had anticipated that larger than usual tax refunds would provide an extra boost again this month, they also had to factor in that the enormous rise in gas prices might drain some of that strength. The actual result was that retail sales in April rose a solid 0.5% from March, matching expectations, but a far cry from the massive increase of 1.6% last month. Strength was seen in appliances, electronics, sporting goods, and hobbies. Supported by powerful stock market gains, upper-income households continue to purchase at a rapid pace, while lower-income consumers are cutting back discretionary spending to focus on necessities. 

Looking ahead, attention will remain fixed on the conflict in the Middle East. Investors also will monitor comments from Fed officials about future monetary policy. The detailed minutes from the April 29 Fed meeting will come out on Wednesday. It will be a light week for economic data. Housing Starts will come out on Thursday.