Inflation Report Rattles Markets

Stock markets were spooked by Friday’s news that a consumer price measure favored by the Federal Reserve showed inflation remaining higher than expected in January.

The Commerce Department’s personal consumption expenditures price index showed a 5.4% increase in January from a year earlier, rising from the 5.3% annual rate of December. Subtracting more volatile food and energy prices, the annual increase was 4.7% in January.

The economy continues to show overall strength, with the government reporting U.S. household spending rising 1.8% in January from the prior month, the largest increase in two years.

The Commerce Department inflation numbers are actually lower than those released earlier this month by the Labor Department, based on different criteria, showing annual inflation at 6.4% in January, down from 6.5% in December and continuing a decline over the past few months. The Commerce Department numbers are also closer to the 2% inflation rate goal set previously by the Fed as the point at which it might stop raising rates.

But Wall Street remains nervous that anything suggesting persistent inflation could encourage the Fed to maintain steep rate hikes that have sent rates for mortgages and other consumer and business loans soaring during the past year. The Dow Jones Industrial Average closed down Friday nearly 337 points, or 1%, for the day, after falling more than 500 points in earlier trading, with the S&P 500 dropping 1% and the Nasdaq Composite declining 1.7%.

Mortgage Rates Rise

Inflation pressures are keeping mortgage rates well above year-ago levels, as rates on most types of loans increased again from the prior week for the week ended Feb. 23.

Government loan-backing agency Freddie Mac said its latest national survey of lenders found 30-year, fixed-rate mortgages averaging 6.5%, up from 6.32% in the prior week and 3.89% a year earlier. The average for 15-year, fixed-rate loans was 5.76%, up from 5.51% a week earlier and 3.14% a year earlier.

“The economy continues to show strength, and interest rates are repricing to account for the stronger than expected growth, tight labor market and the threat of sticky inflation,” Sam Khater, Freddie Mac’s chief economist, said in a statement.

Many potential homebuyers, including apartment renters, are holding off on purchases until rates come down. Khater noted that there is now a wide range of rates being offered by lenders, meaning buyers who shop around could save $600 to $1,200 annually on mortgage payments by finding rate offerings that are below the published averages.

Source: www.CoStar.com