Inflation numbers came in sharply higher today and rates increased – but only a little.
Here is a brief summary of the numbers from the Bureau of Labor Statistics.
Long story short: Inflation numbers are higher than expected and at their highest level since 2008.
So, the question is why didn’t rates spike up further as a result – when everyone is so terrified of inflation?
I have blogged about inflation repeatedly in recent months b/c it influences interest rates and the housing market so much.
Here are two examples: (1) Cage Match of the Century: Inflation vs. Deflation; and (2) 4% Rates By June
As a reminder, higher inflation numbers typically push up interest rates b/c investors do not want their yields exceeded by inflation (or they will effectively lose money).
HERE ARE A FEW POSSIBLE REASONS WHY INFLATION NUMBERS DID NOT PUSH RATES HIGHER:
- Markets anticipated it. Even though inflation numbers came out higher than expected, the markets have already accounted for significant inflation, as is often the case.
- Transitory inflation. Many market watchers believe that inflation is “transitory;” they believe that inflation concerns will lessen as people return to work and supply chains (broken by COVID) are repaired. This will sharply increase supply stocks and bring down prices.
- Fed intervention. The Fed continues to buy both Treasury bonds and mortgage-backed securities en masse, and that continues to keep interest rates artificially suppressed even in the face of inflation.
- Recession concerns. The economy seems to be resurging now but many market watchers, e.g., Barry Habib of MBS Highway, believe there is more underlying weakness than what meets the eye, and that we are due for a recession next year. So, yes, we are seeing inflation now but it will dissipate when the recession comes.
- No place else to park money. The world is “awash in cash” right now with investors desperately searching for places to park that cash in order to preserve its value and/or generate returns in any way they can. Given that many other countries are more precarious than the U.S. with respect to fiscal and monetary policy and given that there are just not enough other investment vehicles to absorb all that cash, the demand for U.S. debt (mortgages and treasuries) remains surprisingly strong (which keeps rates lower too).
I am sure there are other reasons that I am missing, but I nonetheless find it very interesting that rates did not move more in response to today’s reports.
RATES WILL MOVE HIGHER
While rates did not move as much as many expected in response to today’s inflation reports, they most definitely did move.
In addition, it is a certainty that the inflation indicators will continue to increase markedly over the next several months.
This is b/c the inflation indexes (CPI and PPI) are “averages” over the last 12 months, so recent price increases are not fully reflected in current reports (last year’s very low prices are still keeping the number artificially low).
So rates will very likely continue to increase and I still think 4% rates are a real possibility this summer.
The biggest surprise right now is the fact that rates have not moved higher (a theme I have repeated many times over the last 10 years).
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