Inflation Climbs

Mortgage rates continued their trend lower over the past week, but the path was not smooth. Shifts in demand for risky assets, such as stocks, and also safe assets, like mortgage-backed securities, caused mortgage rate volatility. Not even higher inflation levels could keep rates from ending the week at better levels.

The outlook for future inflation plays a major role in setting mortgage rates. Higher inflation causes investors to demand higher yields. There are many components captured in inflation reports, and their costs change at different rates. Of note, there has been a large divergence between the cost of goods and services in the U.S. A stronger dollar and the large decline in commodity prices have helped hold down the cost of goods over the past year. The service sector, however, has remained strong and costs have been rising somewhat rapidly. Shelter and medical costs stand out as significant sources of inflation.

The most recent readings show that inflation is on the rise. The consumer price index (CPI), released on Friday, is the most widely followed monthly inflation indicator. January readings were higher than expected. CPI was 1.4% higher than a year ago, which was the highest level since October 2014. Core CPI, which excludes the volatile food and energy components, was 2.2% higher than a year ago (the highest level since June 2012). Investors will be closely monitoring the upcoming release of the core PCE price index for a similar trend. Core PCE is the Fed’s preferred inflation indicator.

Source: MBS Quoteline

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