With two monthly inflation reports showing an increase in January, why did rates improve on Thursday?

January’s CPI report was hotter than expected, raising inflation to 3.0% and CORE at 3.3%, which caused markets to rethink the timeline for Fed rate cuts and increased mortgage rates. But here’s where it gets interesting: the PPI report released on Thursday, despite showing higher-than-expected inflation at 3.5 and CORE at 3.6, actually hints that the PCE —the Fed’s preferred inflation gauge, will be lower in the coming months.

The reason is that PPI data helps forecast what we can expect from the upcoming PCE report. While the PPI annual inflation rate was higher than anticipated, the monthly PPI numbers were in line with expectations. More importantly, the components of PPI that directly affect core consumer inflation (like wages and prices for goods and services) show signs of cooling, suggesting that core PCE inflation for January (being released on 2/28) will be lower than previously predicted, with expectations now at 0.25%, down from 0.35%.

This sets the stage for a possible slowdown in inflation, which could lead to more favorable conditions for mortgage rates down the line.

CPI = Focuses on consumer prices.
PPI = Focuses on wholesale/producer prices.
PCE = Focuses on overall personal consumption (includes changes in the consumption patterns and is not as rigid as CPI)