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 My Mind on Mortgages » Rate Update August 13, 2010
Time August 13, 2010 at 7:56 am
[...] rose by an annual rate of 1.2% (when you back out volatile food+energy=.9%). Inflation is the primary driver of mortgage rates so this report verifies one reason why mortgage rates have dropped so [...]
Pingback from My Mind on Mortgages » Rate Update September 16,2010
Time September 16, 2010 at 7:56 am
[...] Producer Price Index (PPI) rose in line with expectations in August for the 2nd straight month. Inflation is the primary driver of mortgage rates and currently it is very [...]
Pingback from My Mind on Mortgages » Rate Update September 17, 2010
Time September 17, 2010 at 8:18 am
[...] when you strip out volatile food and energy prices they remained unchanged. Inflation is the primary driver of mortgage rates and one reason why mortgage rates recently dipped was because of the threat of [...]
Pingback from My Mind on Mortgages » Rate Update September 30, 2010
Time September 30, 2010 at 7:00 am
[...] In a separate report the Commerce Department revised higher its previous estimate of 2nd quarter GDP to 1.7% (from 1.6%). However, the inflation gages embedded in this report continue to show that inflationary pressure remains weak which is why mortgage rates are so low. [...]
Pingback from My Mind on Mortgages » Rate Update October 14, 2010
Time October 14, 2010 at 7:51 am
[...] at the wholesale level of our economy. It is an indicator of future inflation which we know is a primary driver of mortgage rates. The report continued to show that inflationary pressures remain weak in our [...]
Pingback from My Mind on Mortgages » Rate Update October 15, 2010
Time October 15, 2010 at 8:14 am
[...] The Consumer Price Index for September showed that price pressure in our economy remains tepid. Inflation is the primary driver of mortgage rates so this is good [...]
Pingback from My Mind on Mortgages » Watching TIPS can be a forecaster for mortgage rates
Time October 25, 2010 at 9:18 am
[...] how are TIPS significant in terms of gauging mortgage rates? We know that inflation is the primary driver of mortgage rates. When expectations for future inflation rises then long-term interest rates [...]
Pingback from My Mind on Mortgages » Rate Update October 29, 2010
Time October 29, 2010 at 8:22 am
[...] gains in the employment market. Other data in the report suggests that inflationary pressure, the key driver of mortgage rates, remains weak. Overall the report is interest rate [...]
Pingback from My Mind on Mortgages » Rate Update November 1, 2010
Time November 1, 2010 at 8:00 am
[...] long-term inflation; a topic I wrote about last November which you can see HERE. Inflation is the number one driver of mortgage rates so I think we may see long-term rates bottom out on Wednesday or [...]
Pingback from My Mind on Mortgages » Rate Update November 2, 2010
Time November 2, 2010 at 8:20 am
[...] thought pattern is that QE2 will require the Fed to increase the money supply which will lead to greater inflation as the economy improves. I wrote about this in my November 2009 newsletter which you can view [...]
Pingback from My Mind on Mortgages » Rate Update November 3, 2010
Time November 3, 2010 at 8:14 am
[...] stated that their objective is to raise inflation back to the 2% target. Inflation is the primary driver of mortgage rates so assuming they’re successful we’ll see long-term rates rise in response to higher [...]
Pingback from My Mind on Mortgages » Rate Update November 15, 2010
Time November 15, 2010 at 9:08 am
[...] stated they wanted to push inflation higher to prevent Japanese style deflation. Inflation is the primary driver of mortgage [...]
Pingback from My Mind on Mortgages » Rate Update November 16, 2010
Time November 17, 2010 at 9:20 am
[...] is the primary driver of mortgage rates so from an interest rate perspective the report is positive. However, as the [...]
Pingback from My Mind on Mortgages » Rate Update December 6, 2010
Time December 6, 2010 at 9:07 am
[...] increased inflation expectations were partly to blame for higher rates during the past few weeks we’re seeing rates improve [...]
Pingback from My Mind on Mortgages » How inflation in China can impact mortgage rates at home
Time December 10, 2010 at 9:25 am
[...] you are a regular reader of this blog then you know that inflation is the primary driver of interest rates. Simply put, if you lend someone some money today and you think the purchasing [...]
Pingback from My Mind on Mortgages » Rate Update December 14, 2010
Time December 14, 2010 at 8:53 am
[...] with expectations. Tomorrow the Consumer Price Index will be reported. Since inflation is the primary driver of mortgage rates we need to pay close attention to these [...]
Pingback from My Mind on Mortgages » Rate Update December 15, 2010
Time December 15, 2010 at 9:01 am
[...] This morning’s Consumer Price Index report showed that inflationary pressure at the retail level of our economy remains in check increasing by only .1% in November. The fact that prices rose by .1% for consumers but .8% for producers (according to yesterday’s PPI index) last month is a sign that business’ profit margins are currently wide enough to absorb the higher costs. If and when these cost increases are passed to consumers we are likely to see interest rates move even higher. [...]
Pingback from My Mind on Mortgages » Mortgage Rate Update January 14, 2011
Time January 14, 2011 at 9:33 am
[...] we know inflation is the primary driver of mortgage rates. This morning’s Consumer Price Index report from the Labor Department showed [...]
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 [...]