The Bureau of Labor Statistics released its Consumer Price Index report for October showing overall inflation increased by 0.4%. This was actually 0.2% below the expected 0.6%. Looking at inflation year over year, there was a decline from 8.2% to 7.7%, which was a lot cooler than the 8% reading expected. When we look at the Core rate, which strips out food and energy costs, there was an increase of 0.3%. The Core rate was softer than the 0.5% expected. This made year-over-year Core inflation decrease by 0.3% from 6.6% to 6.3% making it much lower than the 6.5% expected.
Mortgage rates are related to mortgage-backed securities. When mortgage bond pricing declines, mortgage rates increase. When mortgage bond pricing increases, rates get better. Seeing overall inflation start to come down is a good sign for the bond market and a great indicator that mortgage rates will start to come down. After all, inflation is the arch enemy of the bond market and typically high inflation erodes mortgage bond pricing resulting in higher mortgage rates. As the Federal Reserve increases the Fed Funds Rate to slow the economy, bonds will view this as deflationary and mortgage rates typically improve in this environment.
