Medical Care Services Inflation Matches Cycle High (5.1%)

Housing Market Might Be Fine

Housing market is pivotal because business investment is weak. Currently, the economy can’t handle another blow as GDP growth already might be below 1% in Q4. And, the housing market ended its 7 quarter decline in Q3. It should be strong in Q4 at least. Even with the increase in long bond yields. Average 30 year fixed mortgage rate is still low. A further increase would be problematic.

MBA mortgage applications report from the week of November 8th gave us some support for the thesis that the housing market will keep recovering. And MBA composite index was up 9.6% weekly after falling 0.1%. Refinance index was up 13% after rising 2%. Refinancing will become less popular as long term rates increase. 

As you can see from the chart below, the MBA purchase applications index has been in an upturn since 2016. Yearly comp was easy, but 15% growth is still solid. Weekly growth was 5% following a decline of 3%.

(Click on image to enlarge)

Core Inflation Falls, But Stays Above 2%

Difference between core and headline inflation fell from 0.7% to 0.5% in October. Energy still drove headline inflation lower. Comp is about to get much easier for energy which means headline and core CPI will converge. If you deflate wage growth by headline CPI, it means real wage growth will fall. 

Specifically, energy inflation was -4.2% which is better than the -4.8% rate in September. That’s a big increase when you consider that the comp went from 4.8% to 8.9%. That comp falls to 3.1% in November. Meaning energy inflation should be much less of a drag on headline inflation in the next report. Energy commodities prices fell 7.4% while energy services prices were up 0.4%. Fuel oil prices fell 10.6% and gas prices fell 7.3%.

Headline inflation beat estimates and core CPI missed estimates. Cries of core CPI being above 2% are still here. But have died down a bit lately. Core CPI has fallen and the Fed isn’t planning to cut rates in December. Specifically, monthly headline CPI was 0.4% which increased from 0% and beat estimates for 0.3%. 

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