Interest rates & Inflation
What causes mortgage rates to go up or down? How come one day 30-year fixed rates are 6.00% and the next they’re 6.125%? For many people the vision of a boardroom full of cigar smoking bankers comes to mind when contemplating this question. Or, many believe that the Federal Reserve Bank holds ultimate control with the Federal Funds Rate.
However, the truth of the matter is mortgage rates are entirely determined by the marketplace. Many factors can contribute to the direction of mortgage rates including stock market movements, technical trading patterns of mortgage-backed bonds, geopolitical news but of the most important is inflation.
I have provided a link below to an article that I feel does a good job of explaining the relationship between inflation & interest rates.
The Relationship of Inflation to Interest Rates
As well, here is an except from this article which summarizes the relationship:
When prices increase, your dollar gets to buy less. Over time, prices tend to steadily increase. Hence, your one dollar today is not necessarily equivalent in value to your one dollar tomorrow. A case in point: if you could buy four comic books with your one dollar when you were younger, guess what, Batman? You can’t even buy one these days at that price. That is inflation.
So how is this related to interest rates? Investors, try to preserve the value of their money by investing in activities that have yields that are either equivalent or higher than the inflation rate (therefore, when their expectation for inflation increases, they will demand a higher interest rate to lend their money). Let’s say that the local interest rate is pegged at 6.5%; the money that you earn, save and invest, should be able to at the very least, match that rate. Why, because at the end of the year, if your money stayed inside the piggy bank, its value would’ve been eroded by that rate. So if you save 100 dollars at the start of the year, at the end of the year its worth would’ve been shaved by $6.50 leaving your $100 worth only $93.5…..
So to wrap up, inflation is one of the factors that affect interest rates. When inflation moves up or down, the tendency is to increase or decrease (mortgage) rate(s) as well.
Posted: May 13th, 2008 under Economics & Interest Rates, General Mortgage Info., Housing & Real Estate, Rate Update.
Tags: inflation, interest rate
Comments
Pingback from My Mind on Mortgages » Rate Update October 15, 2008
Time October 15, 2008 at 7:52 am
[...] market has become extremely unpredictable lately. Normally our primary focus is on inflation expectations but this has not played a significant role over the past few weeks. Our secondary focus tends to [...]
Pingback from My Mind on Mortgages » Deflationary environment would lower mortgage rates
Time November 2, 2008 at 3:12 pm
[...] we know that higher inflation causes mortgage rates to increase, it can also be said that deflation causes mortgage rates to decrease. In fact, much of the [...]
Pingback from My Mind on Mortgages » Rate Update November 18, 2008
Time November 18, 2008 at 8:31 am
[...] we know inflation is the primary factor we follow to determine the future direction of interest rates. Mortgage-backed bond prices are essentially unchanged this morning reflecting the lack of [...]
Pingback from My Mind on Mortgages » Rate Update August 4, 2009
Time August 4, 2009 at 7:22 am
[...] The Commerce Department released the Personal Consumption Expenditure (PCE) report today. It showed that consumer prices, excluding volatile food and energy prices, fell by 1.5% last month. All in all the inflation data was tame which is a relief to the Fed. All the fiscal stimulus measures has had many analysts concerned about inflation which we know is bad for mortgage rates. [...]
Pingback from My Mind on Mortgages » Rate Update October 15, 2009
Time October 15, 2009 at 6:35 am
[...] inflation pressures were slightly higher than analysts’ had expected. At least for now inflation does not appear to be a huge threat but traders remain concerned about the long-term implications [...]
Pingback from My Mind on Mortgages » Rate Update October 20, 2009
Time October 20, 2009 at 5:53 am
[...] larger than expected drop. On a year-over-year basis the Producer Price Index dropped by 4.8%. Low inflationary pressure is good for long-term mortgage [...]
Pingback from My Mind on Mortgages » Rate Update November 17, 2009
Time November 17, 2009 at 7:23 am
[...] tame inflation data would help mortgage rates move lower. However, we’ve seen mortgage rates improve over the past couple weeks and it looks as [...]
Pingback from My Mind on Mortgages » Rate Update December 15, 2009
Time December 15, 2009 at 7:42 am
[...] the wholesale level of the economy increased by much more than analysts had expected last month. Inflation is the primary factor that drives mortgage rates so this news is not welcomed by the mortgage [...]
Pingback from My Mind on Mortgages » Rate Update December 23, 2009
Time December 23, 2009 at 7:12 am
[...] Expenditure (PCE) price index showed inflationary pressure remains subdued in the economy. Since inflation is the primary factor that drives mortgage rates this is a good [...]
Pingback from My Mind on Mortgages » Rate Update January 15, 2010
Time January 15, 2010 at 7:17 am
[...] experience significant inflationary pressure until the unemployment rate begins to decline. Since inflation is the primary factor that drives mortgage rates this report is [...]
Pingback from My Mind on Mortgages » Rate Update January 19, 2010
Time January 19, 2010 at 6:59 am
[...] Labor Department will release the Producer Price Index (PPI) for December. Since inflation is the primary factor that drives mortgages rates this report always has the capability to impact mortgage [...]
Pingback from My Mind on Mortgages » Rate Update February 5, 2010
Time February 5, 2010 at 7:13 am
[...] Q4 worker productivity jumped by more than expected and labor costs declined by more than expected (anti-inflationary). [...]
Pingback from My Mind on Mortgages » Rate Update February 16, 2010
Time February 16, 2010 at 6:58 am
[...] Producer Price Index (PPI). On Friday we get the consumer Price Index (CPI). The double dose of inflation related data always has the ability to move [...]
Pingback from My Mind on Mortgages » Rate Update February 17, 2010
Time February 17, 2010 at 7:10 am
[...] The Labor Department reported this morning that year over year import prices increased by over 11% in January. The large increase was mainly due to higher oil prices as a result of a weaker dollar. In a separate report the Federal Reserve reported that capacity utilization and industrial production both increased by more than expected. Both of these reports add to inflationary concerns. Now that an economic recovery is widely expected investors are easily spooked over inflationary data which is bad for mortgage rates. [...]
Pingback from My Mind on Mortgages » Rate Update St. Paddy’s Day 2010
Time March 17, 2010 at 8:09 am
[...] the wholesale level of our economy. The report showed that price pressure is contained which is a good sign for mortgage [...]
Pingback from My Mind on Mortgages » Rate Update March 29, 2010
Time March 29, 2010 at 8:04 am
[...] Expenditures price index (PCE). The report showed that inflation pressures remain weak which is a positive for mortgage [...]
Pingback from My Mind on Mortgages » Rate Update April 13, 2010
Time April 13, 2010 at 8:22 am
[...] should concern themselves with deflationary threats rather than inflationary threats. Since inflation is the ultimate driver of mortgage rates these comments also helped interest rates move [...]
Pingback from My Mind on Mortgages » Rate Update April 30, 2010
Time April 30, 2010 at 7:43 am
[...] In a separate report issued by the Labor Department employment costs in the first quarter came in lower than expected. Since the US primarily has a service-based economy, which is heavily reliant on labor, low employment costs lead to low inflationary pressure. Low inflation is good for mortgage rates. [...]
Pingback from My Mind on Mortgages » Rate Update May 18, 2010
Time May 18, 2010 at 9:24 am
[...] we know inflation is generally the primary factor that drives interest rates. This morning the Labor Department reported that price pressures at [...]
Pingback from My Mind on Mortgages » Rate Update Aaron’s 30th birthday, 2010
Time May 19, 2010 at 8:35 am
[...] which measures price pressure at the retail level of our economy, increased 2.2% from a year ago. Low inflation is good for mortgage rates and also means the Fed is likely to keep short-term interest rates low for the [...]
Pingback from My Mind on Mortgages » Rate Update May 20, 2010
Time May 20, 2010 at 7:54 am
[...] the WSJ reported this morning inflation is at a 4 decade low. Inflation is the primary factor that drives mortgage rates so mortgage rates are [...]
Pingback from My Mind on Mortgages » Rate Update June 16, 2010
Time June 16, 2010 at 7:20 am
[...] In the second of three inflation-related reports due out this week the Labor Department reported that prices at the wholesale level of the economy increased by slightly more than expected. Overall though inflationary pressure remains tame which is good for mortgage rates. [...]
Pingback from My Mind on Mortgages » Rate Update June 17, 2010
Time June 17, 2010 at 7:24 am
[...] by the Labor Department showed that inflationary pressures remain tame. Since inflation is the primary factor that drives mortgage rates this is a positive [...]
Pingback from My Mind on Mortgages » Rate Update July 15, 2010
Time July 15, 2010 at 7:51 am
[...] *Producer Price Index (PPI)- showed inflation is still not a concern which is good news for rates. [...]
Pingback from My Mind on Mortgages » Rate Update July 16, 2010
Time July 16, 2010 at 8:02 am
[...] It’s another busy morning in terms of economic and financial news. Much of the market’s attention is focused on this morning’s Consumer Price Index (CPI) release. The report showed that although month-to-month consumer prices jumped higher than expected the annual pace of inflation remains muted. Year-over-year core inflation increased by the lowest level since 1966. Tame inflation is good for mortgage rates. [...]
Pingback from Mortgage Rate Update » Fed’s forecast for inflation is encouraging
Time August 13, 2008 at 11:39 am
[...] you’re an avid reader of ‘rate update’ you know that inflation is the primary factor that drives long-term interest rates (including mortgage rates). When inflation expectations rise mortgage rates also tend to rise and [...]