A CPI Surge and an MBA Index Bounce

The CPI report massively beat estimates, with April gains of 0.8% for the headline and 0.9% for the core. The April increases rounded from respective gains of 0.770% and 0.917%.

The huge headline and core price surprises entirely reflected outsized April gains of 10.0% for used car prices and 10.2% for airfares.

The headline CPI was restrained by the expected -0.1% drop in energy prices, which broke a 10-month of solid gains. Gasoline prices fell -1.4%, while food prices rose 0.4%.

The y/y CPI headline gain surged to 4.2% from 2.6% in March, 1.7% in February, 1.4% in January and December, and 1.2% in both October and November.

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The core y/y gain surged to 3.0%, from 1.6% in March 1.3% in February, 1.4% in January, and 1.6% over the three months through December.

For upside surprises, we saw a 10.0% rise for used car prices, after a 0.5% March rise, but -0.9% declines in each of the prior three months. New vehicle prices rose 0.5%, after two prior flat readings. We saw a 10.2% rise for airline fares, after a 0.4% March increase, but declines of -5.1% for February, -3.2% in January and -2.5% in December. We saw a firm 0.3% rise for apparel prices after drops of -0.3% in March and -0.7% in February, but prior big gains of 2.2% in January and 0.9% in December.

For price restraint, medical care services prices were flat, after a lean 0.1% March rise, but 0.5% gains in the prior two months. Owners’ equivalent rent rose by 0.2%, after gains of 0.2% in March, 0.3% in February and 0.1% in January. Tobacco prices rose 0.2%, after 0.6% gains in the prior two months, after a 1.8% surge in January.

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On a moving average basis, CPI headline gains are trending higher after the sharp pull-back in Q2 of 2020. We have 6-month average price gains of 0.404% for the headline and 0.268% for the core, versus respective 12-month average gains of 0.340% and 0.244%.

In May we expect CPI gains of 0.2% for both the headline and core, though energy prices have resumed their uptrend. The y/y CPI gain should climb to a likely peak in the 4.4% area from today’s 4.2%, while the y/y core price gain should climb to a 3.3% peak from today’s 3.0%, both due to harder comparisons.

The Fed has attributed the climb in y/y inflation to likely May peaks to “base effects,” but the gains in monthly prices have climbed steadily in 2021 as well, suggesting an uptrend in inflation even if the y/y inflation spike can be partly discounted.

Consumer prices face an ongoing lift from larger PPI and trade price gains through Q1 that are working their way through the system to the consumer level, with widespread capacity constraints and bottlenecks.

ABS REPORT

The Mortgage Applications Index:

The MBA mortgage applications index rose 2.1% in the week of May 7 after a -0.9% drop in the prior week, leaving only the sixth gain in 2021. The rise caps a prior string of eight drops in nine weeks. Low inventories, rising costs, and declining affordability are all headwinds to sales.

The headline rise was led by the refi component, which rose 2.9%, after rising 0.1% last week. The purchase index bounced 0.8%, after falling -2.5% last week and -4.8% in the week before that.

A stabilizing pattern in mortgage rates since March, alongside the housing boom, has supported the MBA index.

The 30-year mortgage rate fell to 3.11% from 3.18% in the prior week, versus 3.17% in the week before that. We saw a 3.36% 2021 peak from mid-March and early-April as the Treasury yield topped out at 1.74% on March 31. We saw an all-time low of 2.85% on December 11. The 5-year ARM fell to 2.57% from 2.76% in the prior week and 2.59% in the week before that.

We expect a -1% drop for the purchase index in May, after a -4.5% April drop, a 3.6% March gain, and a -15.4% February plunge. The purchase index marked a 9-month low in mid-February after a 12-year high in mid-January, and has recovered by only 4.5% on net since the February bottom.

The rise in mortgage rates into 2021 more generally has substantially depressed refi activity, but is clearly also impacting the purchase index, leaving a big impact on the overall MBA measure. We’ve seen little recovery in the purchase index since the big hits in February from the mortgage rate pop, winter storms through most of the country, the Texas freeze, and surging prices for building materials.

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