Almost nothing impacts interest rates as much as inflation.
This is because bond investors (who control interest rates) demand higher yields (rates) when inflation runs hotter.
Agents and mortgage lenders alike should care about inflation because lower rates drive homebuying demand – something we saw take place directly in November and December in response to falling rates.
NAR economist Lawrence Yun often reminds us that as many as 5.5 million more homebuyers qualify for mortgages when rates drop 1%, and 10% of those people jump into the housing market.
So – this is why everyone should be ecstatic about the significant declines in inflation we’re seeing.
Here are some interesting factoids.
- Rates edged a tad higher today in response to a hotter-than-expected PCE release for December – but the bond market does not care. This, of course, contradicts the theme of my blog, but it was a dated PCE number, and PCE was “hot” largely because streaming service fees climbed. In addition, PCE is soooo 20th century…(see #2 below). Rates hardly budged because the bond market knows this.
- Truflation is a job-killing AI (the MOST Interesting factoid). The government has spent decades building its amazingly complex inflation models. There are 2,000 BLS bureaucrats working on the Consumer Price Index alone – and it is pretty cool because it employs 80,000 data points.But, Truflation is an automated AI platform that employs 18 MILLION data points in real time. It is far more accurate than the government’s estimates, and it will be fascinating to see when the government admits this…
Equally interesting to think about is the sheer number of other government jobs AI will be able to eliminate.
- Truflation pegs inflation at only 0.68% right now – a very low reading that bodes extremely well for interest rates.
- Truflation says total inflation has been almost 28.25% since early 2020. A. No wonder middle-class consumers are so upset, as incomes have not risen 28%. B. Turns out you can’t print $5 trillion in COVID “stimulus” without getting inflation. Who knew?
- 16 Nobel Laureates got inflation 100% wrong in 2024. CNN posted a letter signed by 16 Nobel-winning economists in 2024, stating that a Trump victory would lead to inflation driven by tariffs and an overheated economy (from tax cuts and too much stimulus). They were comically wrong.
- Tariffs do not cause inflation. Truflation’s readings are the proof in the pudding. It’s the money supply (see #8 below).
- Hot economies do not cause inflation. “Hot economies cause inflation” is a myth that people like Milton Friedman and Steve Forbes tried to dispel for decades. A hot economy driven by private-sector growth can foster deflation when productivity growth exceeds money supply growth. When economies grow due to excessive government spending, however, we often see inflation, because governments don’t create more stuff/wealth.
- It’s all about the money supply. The true cause of inflation, as Steve Hanke reminds us over and over, is an increase in the supply of money in the economy that exceeds the rate of growth. Inflation is lower today because the money supply grew more slowly 12 to 18 months ago (there is a lag effect). As long as an economy creates more stuff than money, we don’t see inflation.
