Week Of: February 17th, 2025

02-14-25 10:07am The major economic data released this week revealed some unusually large surprises, but they were in opposite directions. Inflation was significantly higher than expected, while consumer spending fell far short. After these offsetting results, mortgage rates ended the week with little change.

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 January, Core CPI was 3.3% higher than a year ago, above the consensus forecast and the highest annual rate since May 2024.

Although this annual rate is down significantly 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 further progress on bringing down inflation remains challenging. In addition, used car prices, auto insurance, and hospital services posted large increases in January.

Another significant inflation indicator released this week, which measures costs for producers, was roughly in line with the expected levels. The January core Producer Price Index (PPI) rose 0.3% from December, matching the consensus forecast. It was 3.6% higher than a year ago, up from 3.5% last month and the highest annual rate since February 2023. 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.

Consumer spending unexpectedly slowed sharply in January, possibly disrupted by bad weather and California wildfires. In January, retail sales plunged 0.9% from December, far more than the consensus forecast for just a slight decline. Particular weakness was seen in autos/parts, online outlets, and sporting goods/hobbies. The decline this month followed a strong holiday shopping season.

Investors will continue to look for additional guidance from Fed officials on their plans regarding future monetary policy. The detailed minutes from the January 29 Fed meeting will be released on Wednesday. For economic reports, it will be a light week highlighted by the housing sector data. Housing Starts will be released on Wednesday and Existing Home Sales on Friday. Mortgage markets will be closed on Monday for Presidents Day.

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