The Bureau of Labor Statistics also released its Producer Price Index (PPI) report for the month of February. This report showed that overall producer inflation decreased by 0.1%. This was much cooler than the 0.3% increase expected. January’s PPI was revised lower by four-tenths from 0.7% to 0.3% causing the year-over-year reading to decrease from 5.7% to 4.4%. The Core rate was flat and a lot lower than the 0.4% increase expected. Year over year, Core PPI decreased from 5.4% to a much cooler 4.4%.
Historically, as inflation decreases, usually the bond market is the beneficiary, and mortgage rates improve. Again, the arch-enemy of mortgage bonds is inflation. Simply put, when inflation increases, mortgage bonds decrease in price, and mortgage rates go up. When inflation decreases, we usually see mortgage bonds increase in price and mortgage rates drop. In these two reports, we see that month-over-month inflation vacillated a little more, but the year-over-year numbers were very promising and showed that overall inflation is decreasing and should put us in a better position rate-wise going forward into the year.