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Rising mortgage interest rates continue to take their toll on demand, especially in the refinance market. Total mortgage application volume fell 2.8% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($548,250 or less) increased to 3.20% from 3.16%, with points rising to 0.43 from 0.34 (including the origination fee) for loans with a 20% down payment.

As a result, refinance demand fell 5% for the week and was 31% lower than the same week one year ago. Refinance applications have dropped in seven of the past eight weeks. The refinance share of mortgage activity decreased to 62.9% of total applications from 63.5% the previous week.

“Activity has been particularly sensitive to rate movements, and last week’s decline was driven by a drop in conventional and FHA refinance applications, which offset an increase in VA refinance applications.” said Joel Kan, MBA’s associate vice president of economic and industry forecasting.

Mortgage applications to purchase a home, which are less sensitive to weekly rate moves, rose 2% for the week but were 6% lower than the same week one year ago. Buyers appear to be coming back to the market after a brief lull. Builders reported strong buyer traffic in a sentiment report out this week from the National Association of Home Builders.

“Purchase applications increased for both conventional and government loan segments, as housing demand continues to show resiliency at a time – late fall – when home buying activity typically slows. The second straight increase in purchase applications suggests that stronger sales activity may continue in the weeks to come,” said Kan.

Mortgage rates continued to move higher to start this week and are now at the highest level in more than three weeks. Rates were influenced Tuesday by a report on October’s retail sales, which rose by 1.7%, making it the strongest month in several years. 

“In general, strong economic data puts upward pressure on rates. Economists were only expecting a 1.4% increase after last month’s 0.8% improvement,” said Matthew Graham, chief operating officer at Mortgage News Daily.

A breakdown of the latest U.S. data indicates that inflation is confined to certain sectors and will not pose a threat to the recovery, according to Carl Weinberg, chief economist at High Frequency Economics.

U.S. CPI inflation came in at an annual 6.2% in October, its steepest climb for more than 30 years.

Energy, shelter and vehicle costs led the gains, which more than wiped out the wage increases that workers received for the month.

The persistent high inflation and continuation of pressures such as supply chain bottlenecks have led many economists to question the Federal Reserve’s long-held view that the spike will be “transitory.”

However, stronger-than-expected October retail sales and industrial production figures this week have indicated that the broader economic recovery may well be on track, even as inflation drives prices skyward.

Weinberg told CNBC’s “Squawk Box Europe” on Wednesday that with industrial output and GDP back to pre-pandemic levels, the U.S. economy has essentially recovered. He argued that the labor market lagging is “typical for economic recessions,” with unemployment following the 2008 global financial crisis taking around a decade to fully recover.

That said, November’s jobs report indicated that the labor market was now gathering steam, with nonfarm payrolls increasing by 531,000 in October and driving the unemployment rate down to 4.6%.

“We have a problem related to specific sectors of the economy, not the economy overall. I was surprised to read those industrial production and manufacturing numbers, but they are what they are, and we are doing it now with 5 million fewer people working than before the pandemic, so this tells us that productivity ought to be up by maybe 3% or more compared to then,” Weinberg said.

He suggested that the market needs to keep productivity gains in mind when looking at wage increases, which are “tolerable with steady, stable prices as long as they are offset by productivity gains.”

Citing High Frequency Economics’ aggregation of data across the component sectors within the CPI reading, Weinberg estimated that around one third are falling while half are growing at less than 2%, which he argued “is not inflation.”

“The rise of selected categories, scattered categories of products within CPIs are making those averages of the basket price move higher, but that doesn’t mean that all prices are moving higher along with all wages,” Weinberg said.

“Inflation is a process of spiraling wages and prices, it is not a one-time event, an off-time shock to prices coming from an understandable supply shock.”

Ignore ‘hysterical people’

Weinberg cited Milton Friedman to make the case that Fed intervention based on these individual pockets of spiking inflation would likely do “more harm than good.” He also highlighted comments from Fed Chair Jerome Powell and Bank of England Governor Andrew Bailey, both of whom have suggested that tightening policy in response to inflation resulting from temporary supply shocks would be counterproductive.

“Let’s not be influenced by hysterical people like Larry Summers, who are telling us that inflation is taking off. Let’s listen to what the people who actually are making policy are telling us,” Weinberg said.

Summers was contacted for comment by CNBC. The former U.S. Treasury secretary has in recent weeks called on the Fed and the Biden administration to tackle rising inflation, and argued that the “transitory” label had run its course.

Despite having long advocated for more expansionary fiscal and monetary policy, Summers, now president emeritus of Harvard University, said in a Washington Post op-ed earlier this week that he had changed his view in the face of the evidence. He also challenged the notion that inflation was confined to just a few sectors.

“In October, prices for commodity goods outside of food and energy rose at more than a 12 percent annual rate,” Summers said.

“Various Federal Reserve system indexes that exclude sectors with extreme price movements are now at record highs.”

U.S. shoppers accelerated their level of spending in October even as the prices of goods jumped at their fastest pace since the 1990s, the Commerce Department reported Tuesday.

Retail sales, a measure of how much consumers spent on goods ranging across categories from autos to sporting goods and food and gas, increased 1.7% for October, compared with 0.8% the previous month.

Excluding autos, sales also increased 1.7%, according to the Census Bureau advance estimate.

The two numbers were above the Dow Jones estimates of 1.5% for the headline print and 1% for the core sales gain.

Online shopping posted the biggest relative gain for the month, rising 4% and good for a 10.2% gain from a year ago. Soaring prices at the pump pushed gasoline sales up 3.9% in October. Year over year, sales increases at stations have surged 46.8%.

The news comes after the consumer price index, measuring a similar basket of goods, increased 0.9% for October and 6.2% year over year. That year-over-year gain was the strongest since 1991. Even excluding food and energy, the CPI was up 0.6% from the previous month and 4.6% year over year.

However, the retail sales numbers — which are adjusted for seasonal variations but not for inflation — indicate consumers are willing to pay the higher prices, despite a recent indication that sentiment is at its lowest level in 10 years.

“So much for soft consumer confidence signaling slower growth; what people do is much more important than what they say,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics.

U.S. households have been flush with cash, thanks to a series of payments Congress approved to combat the Covid pandemic crisis. The spending has totaled more than $5 trillion and included transfer payments in the form of direct checks to millions of Americans, as well as enhanced unemployment benefits, most of which expired in September.

Savings totaled $1.6 trillion in the third quarter, well off the pandemic peak but still at a high level. However, worries over inflation have been creeping up in sentiment surveys.

Spending has remained brisk, however, with debt and credit card outlays up 27% on a two-year basis, according to Bank of America.

Overall, sales are up 16.3% on a year-over-year basis.

Electronics and appliances also rose substantially, up 3.8% for the month, while miscellaneous retailers and building material centers each rose 2.8% and motor vehicles and parts dealers saw a 1.8% increase.

However, sales at restaurants and bars were flat for the month despite rising 29.3% year over year, and clothing stores fell 0.7% but were still up 25.8% from the same point in 2020.

A separate report Tuesday from the Labor Department showed that import prices rose 1.2% in October, ahead of the 1% Dow Jones estimate and the fastest increase since May. That was well ahead of the 0.4% increase in September.

Also, industrial production rose 1.6% in October, ahead of the 1% estimate and a rebound from the 1.3% decline in September. And capacity utilization rose to 76.4%, its highest level since December 2019.

Correction: Excluding autos, sales also increased 1.7%, according to the Census Bureau advance estimate. An earlier version misstated the percentage.

Higher prices and longer wait times do not appear to be turning buyers away from the nation’s homebuilders. With demand still surging, homebuilder confidence in the market for single-family homes rose more than expected in November, to the highest level since last May. 

Confidence rose 3 points to 83 on the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). Anything above 50 is considered positive. Analyst expectations had been for it to remain unchanged at 80. Sentiment stood at 90 in November 2020.

“The solid market for home building continued in November despite ongoing supply-side challenges,” said NAHB Chairman Chuck Fowke, a homebuilder from Tampa, Florida. “Lack of resale inventory combined with strong consumer demand continues to boost single-family home building.”

Of the index’s three components, current sales conditions rose 3 points to 89. Buyer traffic also increased 3 points to 68. Sales expectations in the next six months were unchanged at 84. 

While buyers are plentiful, most of the components that go into building a home are not. That has led some builders, like the nation’s largest, DR Horton, to slow sales in order to make sure they can deliver on time.

Company Chairman, Donald Horton, noted in the company’s most recent quarterly earnings release, “We continued intentionally restricting our home sales pace by selling homes later in the construction cycle to align with our production levels and better ensure the certainty of home close dates for our homebuyers.” 

Not only are builders still experiencing supply chain disruptions and a massive labor shortage, they also can’t find enough land on which to build.  

“Lot availability is at multi-decade lows and the construction industry currently has more than 330,000 open positions,” said NAHB Chief Economist Robert Dietz, who called on policymakers to focus on resolving these issues.

Regionally, on a 3-month moving average for HMI scores, sentiment in both the Midwest and South rose 4 points to 72 and 84 respectively. In the West it rose one point to 84 and in the Northeast fell two points to 70.