A key inflation metric turns negative for the first time since the initial Covid-19 outbreaks
For the past few years, interest rates have remained at elevated levels due to high inflation. The words to describe the inflation have evolved over time; initially it was called transitory, and then persistent, stubborn, and sticky. Now inflation can be called negative.
This week’s Consumer Price Index dropped to -.06% since last month, the first time it’s been negative since the darkest economic months shortly after the initial Covid-19 outbreaks and subsequent economic shutdowns. Moreover, it’s the first time since this battle with inflation began that the month-over-month reading has decreased for 3 consecutive months.
This news is significant for anyone who borrows money (or is planning to borrow money). To combat inflation, governments around the world have increased borrowing costs. The US Federal Reserve Board has consistently reminded markets that they will not lower rates until they are confident that they are on a path to return inflation to their annual target of 2%.
After Thursday’s inflation report, markets are optimistic that the battle against inflation is finally being won. As a result, mortgage rates are falling. For the past 3 months, 30-yr fixed mortgage rates have bounced between 7.0-7.5%. As of yesterday, they are decidedly below 7% for the first time since Easter.
I remain cautiously optimistic that lower inflation readings like this week’s CPI report will become commonplace in the coming months. If that becomes the case, then mortgage rates should continue to fall.