Inflation heats up!
May 20, 2008
Inflation is on its way up as evidence in the recent government releases reports regading PPI and CPI. The core level of inflation in the PPI report has risen over six percent in the past twelve months and .4 percent for the month of April. Inflation is very dangerous for mortgage rates as this challenges the net return on a mortgage bond and typically results in investors wanting a higher yield, thus driving up mortgage rates.
The economy has slowed down considerably in 2008, but the market is clearly struggling with rapidly rising oil prices that are effecting everything from travel to food prices. As inflation continues to increase the pressure will mount on the Federal Reserve to begin considering lowering the rate on the Fed Funds rate. The Fed has been agressive in cutting the Fed Funds and Fed Discount rate this year in an effort to stabalize the credit markets and spur home buying. The dollar has fallen sharply over the past 12 months and this is also having an effect on oil prices and inflation. Mortgage rates for purchase and refinance home loans are firmly near six percent for long term fixed mortgages and these rates have held firm since the early February but could be on the way up with more pressure from inflation.