The word “inflation” reared its head and was in the media spotlight last week again when the Consumer Price Index (CPI) was reported on.  The CPI, which measures inflation on the consumer level, increased by 0.3% for the month of August and was in-line with estimates.  Annually, the CPI decreased slightly to 5.3% from 5.4%.  The “Core” CPI, which is the portion of the index that removes food and energy pricing, increased by 0.1%, but was slightly lower than estimates.  Annually, the core CPI decreased by 0.3% bringing it to 4%, also lower than estimates.

Because this report showed lower than expected levels of inflation, the bond market reacted positively or increased in price which helped interest rates improve off of the bond market’s knee-jerk reaction.  Picture a boat on the ocean, as the tide rises the boat does as well.  When looking at inflation and interest rates, the boat symbolizes interest rates which would be sitting on a sea of inflation.  As inflation rises, mortgage rates go up and vice versa. In this CPI report it showed inflation slowing down which was good for rates.

But, is inflation really slowing down?  Some experts are saying that because the annual CPI is based off of a “rolling” twelve-month period, where the oldest months fall off and the newest months get added, that this Core CPI report was lower because the new 0.1% monthly number replaced a much higher 0.4% monthly number that fell off.  And, the next few months might speak a different tune, because the signs show that a higher CPI inflation report could be down the road again.  This is because the inflation readings of the next few monthly “rolling” twelve that will fall off of the index are much lower, so if the new monthly CPI reports are slightly higher, they will add up to create a higher annual CPI number showing higher levels of inflation.

This is something to keep an eye on because the bond market tends to pay closer attention to this report and mortgage rates react negatively to higher levels of inflation.


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