Are we getting mixed messages? Yes, yes we are.  Again. 

This week the Consumer Price Index showed that year-over-year inflation at the consumer level dropped from 6.5% to 6.4%.  As a consumer, I love it when prices drop. I gotta tell you that I’m definitely feeling the price increases and any reprieve is welcome.  So I’m very to happy to hear that CPI is shrinking…

However, the Personal Consumption Expenditures price index is the inflation indicator favored by the Fed, and the latest figures rose 4.7% from a year ago, well above the consensus forecast of 4.3%. Though less than CPI, PCE was still reported at the highest annual rate increase since since last fall.  Without straining too much at the nuances of each dataset, the important point is that the annual rate of increases of both indices remain far above the Fed’s target level of 2.0%. 

While many analysts thought that inflation would continue to recede back down to the 2.0% target like a feather finding its way ever so delicately to the floor of a nest, Fed officials have been warning repeatedly that the battle will be difficult with both ups and downs along the way. Right now we’re seeing ups and downs in the same day. Up until last week, most economists believed that inflation was under control and the Fed would finish the increases this cycle with a 0.25% in March just for good measure.  

Following data received in the last few weeks though, the markets now view it probable that the FOMC will rase another 0.75% over the next few months. There’s a 73% probability of a 1/4% hike in March, a 70.3% shot for another jump in May, and about a 50% chance that June gets an additional 1/4%.  So that stinks. 
 
In housing news, sales of existing homes, which make up about 90% of the market, fell for the twelfth straight month in January to the lowest number of sales since 2010 and were 37% lower than last year at this time. Inventory levels remain abnormally low. While they are 15% higher than a year ago, they remain at just a 2.9-month supply nationally, which is still far below the six month supply which is typically seen in a balanced market.

The median existing-home price of $359,000 was just 1.3% higher than last January, down from a record high of $413,800 in June. This was the smallest annual rate of price appreciation since 2012, and economists forecast that we will soon see year-over-year price declines. By contrast, new home sales, which account for the remaining 10% of the market, surprised investors with a nice gain of +7% from December. 
 
Following the inflation data released this week mortgage rates climbed to the highest levels since November.