According to Forbes.com, inflation occurs when prices rise, which ultimately decreases the purchasing power of your dollars. For example, during an inflationary period, your dollar could buy you two apples today, but only one apple tomorrow.

There are currently many ways that inflation can spike, but one that stands out more than others is the supply chain constraints due to the Covid-19 pandemic. During the pandemic, some suppliers shut down, and some were working with skeleton crews. Because of this, inventory levels lessened and became tight. As demand started to increase and as the economy started to make a comeback and reopen, this pressured pricing and caused items and services to increase in price across the board hence causing inflation.

The Federal Reserve analyzes inflation consistently by way of the PCE or the Personal Consumption Expenditures Price Index. They actually focus on the “core” components which measure the prices of goods and services while stripping out the volatile pricing of food and energy. The “core” PCE report for July was released at 4.6, which means the index is more than 2% higher than the Fed’s target level of 2%. Atlanta Fed President Raphael Bostic was on CNBC and he said that he hopes to get a “restrictive” policy by year-end which he defined as a Fed Funds rate closer to their target of around 3.5% to 3.7%. Bostic noted that he’s comfortable holding rates at a restrictive level for a while and that it’s premature to think about cutting rates.

Also on the Fed Front, Fed Chair Jerome Powell continued to talk tough on inflation last week saying that it is still far too high and he is committed to doing the job of reducing it. The Bond Market, which impacts mortgage rates, can take this negatively if it seems like the Fed is too far behind the curve, but on the other hand, the bond market can take this positively if the Fed proves that they have its job under control and are doing what it takes to tame inflation.

We need to keep an eye on this because inflation is the arch enemy of bonds. As inflation increases, bonds react negatively and sell-off. This occurs because inflation erodes the return on investment on longer-term fixed rate bonds. As bond prices drop, long-term interest rates increase. Staying in touch with the markets and keeping an eye on inflation is always important and even more important right now. Contact your Advisors Mortgage Specialist to help you learn more about inflation and the Fed.

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