Market Update: Inflation Data Proves Lower-Trending Rates Are Here to Stay

Blog posted On January 16, 2024

Two sets of data have had one strong hold on rate movement over the past few years: jobs data and inflation trends. The higher the inflation or jobs numbers, the higher the rate trends. Last week was different. Though inflation numbers on the consumer price index came in above expectations, rates trended lower. This is big news for a couple of reasons.

Inflation, bonds, and rates

“Bond yields/rates move higher when inflation is high, and the market has been waiting on signs of lower inflation before trading in a way that allows interest rates to move lower,” noted Matthew Graham of Mortgage News Daily. “[The consumer price index] has caused big reactions in rates many times over the past few years. In recent months, it's been showing more and more promise regarding a return to inflation levels that would allow for significantly lower rates.”

Higher inflation…but lower rate trends?

Last week’s consumer price index (CPI) from December came in hot. Though it was expected to increase 0.2% month-over-month, it ended up climbing by 0.3%. Same with the annual inflation levels. The expected level was 3.2% but the actual level was 3.4%. These don’t seem like overwhelmingly large differences, but when it comes to data as charged as inflation or jobs reports, the littlest difference has caused some big volatility in the past. Following the CPI release, markets initially reacted as expected. Bonds were unhappy, rates trended higher. But by the end of the day, they turned things around and ended up trending lower. Why? What’s more important than one report is the overall trend of inflation. Trends aren’t always rainbows and butterflies. Sometimes there will be stints of higher movement. But as long as the general movement is lower, the markets are happy, no one will freak out, and rates will remain steady. The day after the CPI was released, we got news from the producer’s price index (PPI).

“It wasn't until the following day's Producer Price Index (PPI) that bond traders saw better evidence of calmer inflation,” wrote Graham. “Both CPI and PPI have been moving lower, but PPI is now all the way back down to target levels.” With that news, markets gained assurance that the overall downward inflation trend would continue.

What that means for you

In short…good news! It confirms that rate volatility is calming down and the bond market is becoming more resilient. It’s growing back a thick skin and becoming less concerned with one off reports that come in hot. So it’s more likely you don’t have to walk around every corner of new economic reports worried about some drastic rate swings. You can PLAN. You can get ready to purchase in the spring less worried about rates surging madly. Even still, you can get extra protection with Rate Rebound. We’d be happy to talk you through the process! 

Sources: Mortgage News Daily, Mortgage News Daily