Inflation at the wholesale level has the potential to negatively impact Bonds and home loan rates if it begins to rise. Here’s a breakdown of what you need to know and watch in the coming months.
What is the Producer Price Index report? PPI reports on a group of indexes covering sellers of manufacturing, mining, agriculture and electric utilities. It measures the average change in prices of these goods and services over time.
What’s happened recently? The Labor Department reported that PPI fell by -0.8 percent from March 2014 to March 2015, due to declining oil and fuel prices. This was in stark contrast to the +2.1 percent recorded year-over-year back in May 2014.
What’s the bottom line? Inflation is a Bond’s worst enemy as it erodes the purchasing power of a Bond’s future cash flows. And since home loan rates are tied to Mortgage Bonds, it can cause home loan rates to rise if Bonds worsen. In this case, inflation was weak, which helped to lift prices throughout the Bond markets and keep home loan rates at low levels.
I’ll continue to monitor all housing and economic reports closely. If you have any immediate questions, please call or email today.