The Bureau of Labor Statistics released its Consumer Price Index (CPI) report for the month of August. The report showed that overall inflation increased by 0.6%, which was right in line with expectations. Year over year, inflation increased to 3.7%, which was up from 3.2%. This was slightly hotter than expectations. The Core rate, which strips out volatile food and energy prices, showed an increase of 0.3%. This was one-tenth hotter than expectations. Year over year, Core CPI decreased from 4.7% to 4.3%, which was right in line with expectations.
The Bureau of Labor Statistics also released its Producer Price Index (PPI) report for the month of August. This report showed that overall producer inflation increased by 0.7%. This was hotter than the 0.4% increase expected. Year over year, producer inflation increased from 0.8% to 1.6% largely due to energy prices. The Core rate increased by 0.2%, coming in right in line with expectations. Year over year, Core PPI decreased from 2.4% to 2.2%, which was also in line with expectations.
Historically, as inflation decreases, usually the bond market is the beneficiary, 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 these two reports, we see that headline inflation vacillated a little more, but the year-over-year Core numbers were very promising and showed that inflation is slowly moving in the right direction.