The focus of this inflation report is the Core rate, which removes volatile food and energy prices, and it increased by 0.4%, for the month of March which was in line with estimates. Year over year, Core CPI increased from 5.5% to 5.6%. After this report and going forward, one should expect core inflation to considerably decrease. Shelter costs accounted for most of the total increase in CPI, which is a lagging metric within this report. Shelter rose by 0.6% and is now up 8.2% year over year, which is an increase from the previous 8.1%. Rent rose 0.5% and are now up 8.8% year over year, which is unchanged. Owner’s equivalent rent, rose 0.5% and is up 8% year over year; also unchanged. While the CPI shelter costs are still catching up and adding inflationary pressure, real shelter costs have been coming down. Because shelter makes up 43% of Core CPI, it was the main cause of the 0.4% monthly gain. It does appear that shelter costs are no longer accelerating as they were on a year-over-year basis and have reached a peak. We know that real shelter costs are up roughly 2.6%, via the Case Shiller index year over year vs the 8.2% reflected in the CPI. If this were caught up, and because shelter makes up 43% of the core index, Core CPI would be much lower. There should be a very favorable (low) reading for the April data, which we will be released on May 10.
Why is this important?
Historically, as inflation decreases, usually the bond market is the beneficiary to this, and mortgage rates improve. 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 this report, we headline annual inflation much lower and core inflation only increasing by 0.1%. As we move through the year, there should be very promising releases as the trend is moving lower. Lower levels of inflation should put us in a better position rate wise moving into next year.