Inflation Hot But Below Expectations

By Kurt Real Estate Jul 1, 2021

The Fed’s favored measure of inflation, Personal Consumption Expenditures (PCE), showed that
headline inflation was up 0.4% in May, which was beneath estimates of 0.6%. Year over year, the index
increased from 3.6% to 3.9%, and while this is the hottest reading in 13 years, it was also beneath
expectations of above 4%.

Core PCE, which strips out volatile food and energy prices and is the Fed’s real focus, was up 0.5%
for the month. Year over year, Core PCE increased from 3.1% to 3.4%. These figures were as expected.
This rise in inflation has been expected because the readings for the more current months are
replacing the readings from 2020 when much of the economy was shut down due to the pandemic.

Even still, rising inflation is significant because inflation reduces the value of fixed investments. This
includes Mortgage Bonds, to which home loan rates are inversely tied. In other words, rising inflation
can cause Mortgage Bonds to worsen or move lower and home loan rates to rise. Though many
factors impact the markets, I will continue to monitor the data regarding inflation this summer.

Of note within the PCE report, personal income was down 2%, which was slightly better than
expectations, while personal spending was unchanged and lighter than estimates of 0.4%.
With respect to income, the most important component is wages/salaries for private industries.
They rose 0.8% after two straight months of 1.1% gains, and they are also up by almost 16% year over
year. Private sector employees make up a large portion of the homeownership rate, and with private
sector wages growing at such a rapid pace, this does bode well for affordability even with the
appreciation levels we’ve seen.

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