You may have seen interest rates tick up last week? This happened for a few reasons, but the main one has to do with inflation. What is inflation? Inflation occurs when prices rise, decreasing the purchasing power of the dollar. A good example of this is when a dollar can buy four apples today, but only two apples tomorrow. The dollar weakening in this example represents inflation.
Last week the Producer Price Index or the PPI was released showing that inflation on the wholesale level rose by 1.3% for the month of January. This number came in much higher than expectations of 0.4%. Year over year, the PPI came in at 1.7% which was more than expectations as well and more than double the previous release. The “core” number, which strips out volatile food and energy prices, was at 1.2% for the month and up 2.0% for the year, which again almost doubled the previous release.
When this news was reported on Tuesday, the bond market took a nose dive causing interest rates to go up. Bond investors fear inflation because inflation erodes the return on investment made on long term bonds. It essentially weakens the profitability and the investment. Therefore, bonds fell and yields rose, causing interest rates to increase.
Other economic indicators or reports that showcase levels of inflation like the Consumer Price Index and the Personal Consumption Expenditure have been tame, so the higher-than-expected PPI release certainly threw the markets a curveball.
Inflation is certainly a hot topic and with all of the economic stimulus it is surely on track to creep up sooner than later.
Be sure to contact your Advisors Mortgage Loan Officer today so they can share their expertise on the market, interest rates and inflation.