Commodities Stoke a Whiff of Inflation
•The Consumer Price Index for December increased by 0.4 percent for the month.
•Core CPI increased by just 0.1 percent for the month.
•Both Purchase and Refi Apps jumped in early January.
The Consumer Price Index for December increased by 0.4 percent as energy prices climbed with tightening global crude oil markets. Over the previous 12 month period, headline CPI was up by a still-low 1.4 percent. As we have noted, commodity prices are generally on the rise as demonstrated by the ISM Manufacturing and Services reports for December which showed that all commodities listed in both reports increased in price in December. The push on the CPI from rising non-energy commodity prices is indirect for the most part and may be thwarted by other factors including increased efficiency and substitution on the part of manufacturers and service providers. Still, there was a whiff of inflation in the air at year end 2020, enhanced by the falling value of the dollar which boosts import prices. Inflation dynamics are complex. Conventional wisdom says that in a weak economy reduced demand leads to softer prices. Also, many of the well-documented disinflationary and deflationary forces we have experienced over the last few decades are still in place, namely, increasing computational efficiency, increasing agricultural efficiency and lower population growth. De-globalization, or more accurately, changing globalization, may also play a role in inflation dynamics in the years to come.
In December, energy and food pushed the headline CPI higher. The energy price sub-index gained 4.0 percent for the month as gasoline prices gained 8.4 percent. Even with the December jump, the energy price sub-index was still down 7.0 percent over the previous 12 month period. Food prices also increased by 0.4 percent for the month reflecting a broad-based increase in grocery store prices through 2020. Over the previous 12 months, the food price sub-index was up 3.9 percent, well ahead of overall inflation. Core CPI (all items less food and energy) was sedate, gaining only 0.1 percent in December. Core CPI was up by 1.6 percent over the previous 12 months.
Mortgage applications for purchase increased by 8.0 percent for the week of January 8 after easing the week before. Refi apps jumped by 20.1 percent, building on their moderate gain the week before. On a four-week moving average basis purchase apps were up 20 percent from a year earlier, while refi apps were up 125 percent. According to the Mortgage Bankers Association, the rate for a 30-year fixed rate mortgage inched up to 2.88 percent.
Market Reaction: U.S. equity markets opened with losses. The 10-Year Treasury bond yield is down to 1.10 percent. NYMEX crude oil is up to $53.22/barrel. Natural gas futures are up to $2.71/mmbtu.
