Inflation can have a big impact on the Bond markets, and also on home loan rates, which are tied to Mortgage Bonds. Here’s what you need to know.

What is the Consumer Price Index (CPI) report? The CPI averages price changes on a predetermined basket of goods including transportation, food, energy and medical care. The report is used to assess price changes associated with the cost of living.

What’s happened recently? Fueled by declining prices in oil and gas, CPI fell 0.1 percent in August, matching expectations. This was the first negative reading since January. The annualized Core CPI, which leaves out volatile food and energy prices, weighed in at 1.8 percent, which is slightly below the Fed’s target of 2 percent annual inflation.

What’s the bottom line? Inflation is known as the archenemy of Bonds, as inflation reduces the value of fixed investments like Bonds. This means that when inflation starts to rise, Mortgage Bonds often worsen in value. Home loan rates are tied to Mortgage Bonds, so when Mortgage Bonds worsen, home loan rates tend to rise.

The good news is that low inflation often goes hand in hand with low home loan rates—and inflation remains low at this time, helping home loan rates remain attractive. However, if inflation begins to creep into our economy, it can create rapid changes in the interest rate climate.

I’ll continue to monitor inflation reports closely, but if you have any immediate questions, please call or email today.