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WARM FRONT IN THE FORECAST: CPI, MORTGAGE DEMAND

Today's economic data is showing the effects of the U.S.-Israeli war on Iran, now in its fourth month, and the resulting closure of the Strait of Hormuz.

The Labor Department's Consumer Price Index (CPI) USCPI=ECI, which tracks the prices urban consumers pay for a basket of goods and services, grew by 0.5% in May. That was cooler than April's 0.6% print and in line with consensus.

Year-over-year, CPI posted a 4.2% increase. While that's a significant acceleration from the prior month's 3.8% growth, it hit analyst expectations on the nose.

Core CPI, which strips out volatile food and energy prices and is often referred to as "underlying inflation," printed on monthly and annual bases at 0.2% and 2.9%, respectively.

The monthly increase marked a slightly more abrupt cool-down than economists projected, but the slight increase in the annual number, from April's 2.8%, stuck the landing.

It's the second take on May inflation, after Friday's on-the-money wage growth data.

The report "suggests that inflation is still a problem, but the fact that the core is below 3%, I think is a good sign that maybe - and it, of course, all depends on the war - that energy inflation may have peaked," Peter Cardillo, chief market economist at Spartan Capital Securities, tells Reuters. "If the war doesn't linger on ... we're not going to see inflation metastasize to other sectors, but if energy prices remain elevated or if they go higher, I think we'll see a rate hike in the first quarter of 2027."

Line-by-line, a 3.9% monthly jump in energy prices, following April's 3.8% increase, prompted a 7.0% surge at the gasoline pump. The prices consumers are paying at the pump have surged by an eye-watering 40.5% since May 2025.

Transportation costs increased by 1.3%, a repeat of the prior month, and are up 9.3% year-on-year. The cost of an airline ticket rose by 2.7%, and has shot up by 26.7% in the last 12 months. Food prices cooled down to 0.2%.

The cost of shelter and services, two metrics closely watched by the Fed, both rose by 0.3%. Year-over-year, shelter prices have risen by 3.4% and services show annual growth of 3.5%. Both continue to coast well north of annual core inflation.

"Just because the inflation numbers came in consistent with expectations doesn’t mean they are good," writes Nigel Green, CEO at the deVere Group. "Indeed, it’s the first major inflation test facing newly installed Fed Chair Kevin Warsh, strengthens the case for a more hawkish central bank, and leaves investors dangerously exposed if they continue to underestimate the inflation threat."

Crossing the street to the housing market, the mortgage game pulled off a nifty parlor trick last week: borrowing costs increased, but so did demand.

The average 30-year fixed contract rate USMG=ECI increased by 3 basis points to 6.60%.

That didn't seem to bother would-be borrowers one bit. Demand for loans to purchase homes USMGPI=ECI rose 7.3%. Refi applications USMGR=ECI - which accounted for a growing 40.2% share of the mortgage pie - jumped by 15.3%.

Combined, home loan demand grew by an impressive 10.8% last week.

"Mortgage rates were volatile last week as news from the Middle East continues to drive markets,” writes Mike Fratantoni, MBA’s chief economist, who adds that despite the overall increase in borrowing costs, “there were opportunities where borrowers were seeing somewhat lower rates.”

The 30-year fixed rate currently sits 33 basis points below where it was during the same week a year ago.

Over that same period, purchase applications have grown by 3.5%, while refi demand has increased 20.0%.

(Stephen Culp)

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