Market Update for Week of May 16

On the mortgage front, rates have been bumping around a narrow trading range the last couple of weeks and ended last week nearly unchanged. Although the Consumer Price Index (CPI) inflation data came in slightly higher than expected on Friday, mortgage rates were resilient and even nudged a hair lower after the news. While Core CPI remained well below the Fed's target range around 2.0%, it was up from 1.2% last month and 0.8% at the end of teh last year, meaning that the trend has clearly been moving higher.

Inflation is negative for mortgage rates, so the question is why mortgage rates remain at the lowest levels of the year despite rising inflation data. The likely answer is that investors expect that the majority of the increase in inflation has already taken place. Fed officials have maintained that they expect the inflationary effects of higher oil prices to be "transitory", and the recent drop in oil prices has supported the Fed's position. Meanwhile, wage growth, a major factor in inflation levels, has been minimal in recent months. For these reasons, current inflation expectations remain relatively low.