Inflation Heading Downward?

Since consumer demand for many products has all but evaporated as a consequence of the pandemic’s shutdown of the economy, it’s natural for consumer prices to fall. Thus, the Consumer Price Index (CPI) in May was barely 0.1% higher than a year ago.

This is a big reversal from the trend during the months just prior to the shutdown, when consumer prices were rising faster — especially in the last quarter of 2019. The rate of increase in the “core” CPI has also slowed, to 1.2% in May from a rate above 2% late last year, although it has not declined as sharply as the overall CPI.

The Bureau of Labor Statistics estimates the “core” CPI by excluding energy and food products from the calculation, to get to what economists refer to as the underlying inflation rate. The excluded items tend to have high month-to-month volatility, which disturbs the underlying pattern.

However, despite the official estimate of price inflation being nearly zero, more consumers are lately complaining about the high prices they are paying for many goods today.

In fact, results of the University of Michigan’s June survey indicate that consumers expect inflation to rise by 3% over the next year, which is vastly different from the 0.1% CPI increase posted in May.

Why the apparent disconnect?

One reason is that consumers have a greater recall for the price of items frequently purchased, such as food. And food prices are rising fast, as shown in the chart below, which shows that food prices have risen 4% over the last year — the second highest among all major categories, trailing only medical care.

Aside from food prices, a second reason for the disconnect is that the average price calculations used to derive the CPI are based upon the individual prices of a combination of goods and services, referred as a basket of goods. This basket reflects the items that consumers typically purchase. But we know that the spending done by consumers during the shutdown has been anything but typical; in fact, a large number of consumers saw their customary spending severely restricted by the pandemic.

Evidence that consumers spending patterns have changed radically as a result of the pandemic shutdown is the sharp change in their savings rate. Consumers had been saving, on average, about 8% of their disposable income throughout last year. But the rate rose sharply, to 33% in March, the latest data available. It is unprecedented that consumers are saving one-third of their income.

Consumers Regain Confidence

As expected, consumers feeling more confident about the economy and their financial condition as states have eased stay-at-home restrictions and begun the reopening process in late May.

The improving confidence is captured by the University of Michigan’s latest survey of consumers, which shows the index rose 5.2 points in June to reach 78.9.

Both of the major components of the index rose in June, including consumers’ assessment of current conditions, which rose 4.8 points to 87.8, and their future expectations, which was up a more robust 5.4 points, to 73.1.

Fewer Unemployment Claims Filed

Fewer people filed for unemployment benefits last week, with that number falling to 1.54 million for the week. This is 355,000 fewer people than the previous week, when nearly 1.9 million filed for benefits.

The number of individuals laid off who are claiming unemployment benefits has been falling since the last week of March, when nearly 7 million people filed.

The number of continuing claims — those who filed and are receiving weekly benefits —  dropped by 339,000 the last week of May (continuing claims are released one week behind the actual claims data; that is, the latest actual claims data is for the week of June 6, but the continuing claims reference period is May 30).

The total number of people who have filed for unemployment claims since the middle of March, 44 million as of last week, is much larger than the number who are actually receiving benefits. This is because the paperwork for many who have filed is still being processed, as well as the fact that many who have filed do not qualify or meet the criteria to receive benefits.

Mortgage Rates Rise for Second Consecutive Week

Prior last week’s announcement by the Fed that it will not raise interest rates for the next two years, the 30-year, fixed mortgage rate moved up by three basis points (0.03%) to 3.18%. This is the second modest increase in the last two weeks, but it is not expected to dissuade consumers from borrowing funds for home purchase or refinancing an existing mortgage.

In fact, the latest issue of the Mortgage Bankers Association’s weekly survey showed that mortgage applications increased in the first week of June. According to the survey, applications were 9.3% higher than the previous week, although the proportion of applications for refinancing an existing mortgage accounted for 61% of the total, up from 60% the previous week.

Demand for mortgages to purchase a home should increase over the next few weeks, as more businesses reopen and consumers may feel that the threat from the coronavirus pandemic is ebbing.

Manuel Gutierrez, Consulting Economist to NKBA

Explanation of NKBA’s Economic Indicators Dashboard

The dashboard displays the latest value of each economic indicator with a colored triangle that highlights visually the recent trend for each of the drivers. “Green” is a positive signal, indicating that the latest value is improving; “Yellow,” as it’s commonly understood, denotes caution because the variable may be changing direction; “Red” indicates that the variable in question is declining, both in its current value and in relation to the recent past.

Note that all the data, except for “mortgage rate” and “appliance-store sales” are seasonally adjusted and are represented at annual rates.

Remodeling Expenditures. This is the amount of money spent on home improvement projects during the month in question. It covers all work done for privately owned homes (excludes rentals, etc.). The data are in billions of dollars and are issued monthly by the U.S. Department of Commerce.

Single-Family Starts.  This is the number of single-family houses for which construction was started in the given month. The data are in thousands of houses and are issued monthly by the U.S. Department of Commerce.

Existing-Home Sales. These data are issued monthly by the National Association of Realtors and capture the number of existing homes that were sold in the previous month.

High-End Home Sales. This series are sales of new homes priced at $500,000 and higher. The data are released quarterly by the U.S. Department of Commerce and are not seasonally adjusted. Thus, a valid comparison is made to the same quarter of prior year.

Mortgage Rate. We have chosen the rate on 30-year conventional loans that is issued by the Federal Home Loan Mortgage Corporation (known popularly as Freddie Mac.) Although there are a large number of mortgage instruments available to consumers, this one is still the most commonly used.

Employees in Residential Remodeling. This indicator denotes the number of individuals employed in construction firms that do mostly residential remodeling work.

Building-Materials Sales. These data, released monthly by the Department of Commerce, capture total sales of building materials, regardless of whether consumers or contractors purchased them. However, we should caution that the data also includes sales to projects other than residential houses.

Appliance-Store Sales. This driver captures the monthly sales of stores that sell mostly household appliances; the data are stated at an annual rate. We should not confuse this driver with total appliance sales, since they are sold by other types of stores such as home centers.

We hope you find this dashboard useful as a general guide to the state of our industry. Please contact us at if you would like to see further detail.