Gasoline Fuels Consumer Price Inflation
- The Consumer Price Index for November gained 0.4 percent with higher gasoline prices.
- Mortgage Applications slipped in early December.
Consumer price inflation was fueled by rising gasoline and other petroleum product prices in November. Gasoline prices were up 7.3 percent for the month, and by 16.5 percent over the previous 12 months. According to AAA, the national average regular gasoline price was $2.45 per gallon yesterday, 13 cents above the year ago level. The CPI energy sub-index gained 3.9 percent in November. Food prices were unchanged for the month. Most other components were subdued. Excluding food and energy, core CPI increased by just 0.1 percent in November. Over the previous 12 months, core CPI was up by 1.7 percent in November, about where it has been since last May. Today’s mixed CPI report for November, and a similar Producer Price Index report released yesterday, will give inflation hawks and doves something to talk about. On the one hand, recent headline inflation has warmed up. On the other hand, core inflation metrics remain subdued. We expect the Federal Reserve to stick with its expectation of gradually firming inflation in the monetary policy announcement that will be released this afternoon at 1 p.m. CST. This is a key justification for ongoing gradual interest rate increases, including a rate hike widely expected to be announced today. The Fed’s inflation expectations will be central to monetary policy next year as Jerome Powel takes over as chairman of the Federal Open Market Committee.
Given that the Fed’s inflation expectations will help set the course for the fed funds rate next year, the Fed’s inflation expectations will also influence mortgage interest rates. We look for gradually increasing mortgage rates next year, possibly coming in combination with a reduction of the mortgage interest deduction in the final tax reform bill. Reports yesterday said that Congressional negotiators agreed to cap the mortgage interest deduction at mortgages of up to $750,000 for newly purchased properties, representing a compromise between the House and Senate versions of tax reform. The potential double headwind from increasing mortgage rates and reduced mortgage interest deductions poses some downside risk for the housing market. Home sales remain relatively subdued at this late stage in the business cycle. According to the Mortgage Bankers Association, the interest rate on a standard 30-year fixed-rate mortgage increased to4.20 percent for the week ending December 8. The composite index for mortgage applications fell in early December as both purchase and refi apps eased. November saw consistent weekly gains in purchase apps, which is a positive sign for November new and existing home sales.
Market Reaction: Equity markets opened with gains. The 10-Year Treasury bond yield is down to 2.37 il is down to $57.11/barrel. Natural gas futures are up to $2.71/mmbtu.
For a PDF version of this report click here: CPI_12132017.
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