The Bureau of Labor Statistics released their Consumer Price Index report for August showing that overall inflation increased by 0.1%. This is a lower figure, but larger than the expected -0.1%. Year over year, inflation declined from 8.5% to 8.3% however, inflation was expected to drop to 8.1%. The Core Rate, which strips out food and energy prices increased from 5.9% to 6.3%. This was higher than the 6.1% that was expected.

Shelter rose by 0.7% which is the biggest increase seen since 1991. Rental pricing also rose 0.7% last month and is now up 6.7% year over year from 6.3%. Owner’s equivalent rent, which tries to capture the rise in home prices, but usually falls short of doing so, also rose by 0.7% and is up 6.3% year over year from 5.8%.

A quick look at the internals shows that energy prices fell 5% from a month ago. This brings the annual gain to 24%. Gasoline prices fell by 11%, but are up 26% year over year. Food prices, which happen to make up 14% of the CPI, rose 0.8% in August. Food prices are up 11.4% year over year.

So, what does all this data mean? Well yes, inflation is still high. However, we feel that there will likely be a turn. In an attempt to curb inflation at the next Fed meeting on September 21st, they will be hiking the Fed Funds Rate. More than likely the Fed will be increasing the Fed Funds Rate by 75 basis points. Again, the arch enemy of bonds is inflation and when inflation rises, mortgage bonds drop in price. When mortgage bonds drop in price, mortgage rates go up. However, if the Fed hikes the Fed Funds rate in an attempt to slow inflation, the bond market will view this as deflationary and bond prices should improve which should cause mortgage rates to decrease. The housing market still has a lot of opportunity and it is still better to buy a house rather than rent no matter what spin the media tries to put on things.

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