The 1970s and 1980s brought unforgettable economic lessons about inflation. Since then, some market participants have watched inflation like this Hawkseven if they didn’t need it.
After the start of the pandemic, the massive fiscal stimulus (Covid Relief Bill) and monetary precautions of the Fed (bond purchases and interest rate cuts) had inflationary fluctuations high alert. Fed spokesmen reacted consistently: YesInflation is likely to rise this spring for a variety of reasons, but it would not necessarily be evidence of a sustained shift.
Inflation can be measured in a number of ways. However, the most basic and popular are the price indices published by the government. The Consumer price index (CPI) is one of the two dominant forces in this regard and this week brought a new update for the month of April.
While analysts approved the Fed’s inflation warning, they did so this week indeed CPI data even exceeded that most aggressive Forecasts, both monthly and yearly.
What’s So Bad About Inflation? Didn’t the Fed say that inflation should stay a little higher compared to its typical target?
Yes, it actually is the Fed to attempt keep inflation higher than normal because they argue that it will encourage stronger economic recovery for a greater part of society. Regardless of your opinion on this complicated topic, everyone agrees “too much” Inflation is a Bad Thing.
One of the main negative effects of high inflation on the mortgage / real estate market is that it drives interest rates higher.
Here is a quick explanation why:
Mortgage rates are mainly determined by trading in the bond market. Investors who buy bonds generate returns by arranging payments over time on terms that have been agreed in advance. Inflation robs these payments of future purchasing power (I’ll give you $ 100 / month for 30 years, but what if a pack of chewing gum costs $ 100 in 30 years?). If investors expect higher inflation, they adjust by charging higher interest rates today.
That scenario played out immediately in the bond market on Wednesday, with 10-year government bond yields rising suddenly in the wake of the inflation report.
This looks pretty dramatic on the 5-day chart, but by and large the bond market must have taken the inflation surprise with it in every step.
The second half of the week was spent bouncing back into dominant territory with a weak retail report doing nothing. We’re going to stop crediting the data for rate recovery just because this streak remains exceptionally volatile. Nobody wants to read too much into another “Rebound month” after last month’s stimulus check effect.
Mortgage rates were logical higher in the week, even if several headlines suggested it was lower. These headlines almost certainly cite Freddie Mac’s weekly poll data. Until the poll is published on Thursday, it can be very stale when interest rates were highly volatile at the beginning of the week.
Bring in next week Loads of reports on the subject of housing with Builder Confidence on Monday. The housing construction numbers will follow on Tuesday and the key existing home sales report will be released on Friday. Analysts expect real estate data to remain fairly stable at last month’s levels.