The Bureau of Labor Statistics released its Consumer Price Index report for December showing that overall inflation decreased by 0.1%. Inflation declined year over year from 7.1% to 6.5%. Both of these readings were right in line with expectations. When we look at the Core rate, which strips out food and energy costs, there was an increase of 0.3%. Year over year the Core rate decreased from 6% to 5.7%. Both of these readings as well were right in line with expectations. It is very important to note that CPI has fallen quite nicely off its highs. Headline CPI was up as high as 9% at its peak and is now at 6.5%. Core CPI was up to 6.7% at its peak and is now at 5.7%. We are definitely seeing meaningful progress with inflation decreasing.

Seeing overall inflation come down is a good sign for the bond market and a great indicator that mortgage rates should head downward. Mortgage rates are related to mortgage-backed securities. Inflation is the arch-enemy of the bond market because as inflation rises, it erodes the investors’ return on their investment. However, the December Consumer Price Index report shows that inflation is in fact decreasing. Once again, we are seeing meaningful declines from the previous CPI report’s highs. We feel this progress should bode well for the bond market and lower mortgage rates should follow.

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By: Jon Iacono
A Family

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