Takeaway: A mild inflation report should have little effect on mortgage rates today. Today’s data continues the narrative that the worst of inflation fears are solidly behind us.
Core inflation, which the Fed focuses on, came in slightly below expectations and the details suggest there is little risk of inflation rebounding this year.
- Core CPI, which strips away the volatile food and energy categories, was 0.28% month-over-month in January, just slightly below expectations of 0.34%. It would have been lower except for an unusually high reading in airline fares (6.5%), which should not pass through to the Personal Consumption Expenditures (PCE) measure of inflation, which the Fed prefers to use.
- The annual growth rate of 2.5% for core CPI is the lowest since March 2021. However, it is still downwardly biased from assumptions the Bureau of Labor Statistics made to fill in missing data from the October government shutdown whereas the monthly growth rate is not.
- Shelter inflation, the largest and most important category, continues to produce mild readings as expected with both rent of primary residence and owners equivalent rent coming in at 0.2% month over month.
- All in all, there appears to be little reason to worry about tail risk from inflation in the upcoming year. The remaining excess inflation above the Fed’s target is expected to resolve itself as tariff effects pass through.
The Fed is now solidly focused on the labor market and likely to hold rates steady with just two cuts in the back half of the year. That means mortgage rates are unlikely to move up or down much for the foreseeable future barring unexpected economic data.
