Steady Inflation – March 2019 Edition

It was a light week for economic news with few surprises, and mortgage rates ended nearly unchanged.

One big reason that mortgage rates have improved in recent weeks, and that the Fed has shifted toward looser monetary policy, is that inflation has held steady. Despite a very tight labor market by historical standards, wage growth has been moderate, and overall inflation levels in the economy have been constrained.

This trend continued in January, as the core PCE price index, the inflation indicator favored by the Fed, was just 1.8% higher than a year ago. The Fed’s stated target for annual core inflation is 2.0%, and core PCE has held in a narrow range at or just below this level for the past year.

The latest figures on home construction were not encouraging, although unusually bad weather influenced the results. In February, overall housing starts fell 9% from January, which was far below expectations. Single-family starts posted an even larger decline of 17% from January to the lowest level since May 2017. Permits to build single-family homes, a leading indicator, were roughly unchanged. Builders point to rising land, labor, and materials costs, as well as high regulatory standards, as obstacles to additional construction.

Looking ahead, the important monthly Employment report will be released on Friday. As usual, these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, Retail Sales will be released on Monday. Since consumer spending accounts for about 70% of all economic activity in the U.S., the retail sales data is a key indicator of growth. The ISM national manufacturing index will come out on Monday and the ISM national services index on Wednesday. In addition, news about the British exit (Brexit) from the European Union could affect mortgage rates.

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