Tag: inflation and interest rates

How BIG of a threat is inflation right now?

Posted on by Evan in Economics & Interest Rates

As I blogged about yesterday (HERE), the recent increase in mortgage rates has been prompted by an increase in inflation expectations.  If you’ve been reading the newspaper or listening to some of the financial commentators then you may be worried about the recent increase to commodity prices.  And if you monitor mortgage rates then you may be concerned because inflation is the primary driver of mortgage rates.

The Economist magazine have a couple good pieces about inflation in their current issue (see HERE and HERE).  Their view?  Inflation is certainly on the rise but mostly in the developing world where a greater percentage of income is spent on food and energy. In the developed world we are seeing price pressure but from very low levels and at this point it’s too early to sound any alarm on hyper-inflation.

This bodes well for interest rates.  I’ve been writing since last fall that rates would have to begin moving higher.  My hope is that they don’t get shocked higher but move gradually instead.

What do you think?  Do you believe we’re in for an acute rise in rates or will they increase gradually?  Leave your comments below.

Online inflation guage

Posted on by Evan in Economics & Interest Rates

The WSJ’s Real Time Economics page led me to THIS WEBSITE which is a pretty cool project.  According to the website…

Inflation is a significant measurement for the economic health of countries around the world, but rates are often reported weeks after data is collected. To address this problem, Professors Roberto Rigobon and Alberto Cavallo at MIT Sloan School of Management have launched the Billion Prices Project (http://bpp.mit.edu), the first Website to publish daily price indexes and provide real-time inflation estimates around the world. Over the past three years, the team developed a methodology to systematically collect prices of items sold by online retailers and compute inflation statistics on a daily basis. More than 5 million prices are monitored every day from categories such as food and beverages, household products, electronics, apparel, and real estate. While the project tracks prices in more than 50 countries, it currently publishes data for a smaller subset that includes the U.S. and U.K. as well as Argentina, Australia, Brazil, Chile, China, Colombia, France, Italy, Turkey, and Venezuela.

If you’re a reader of ‘rate update‘ you know that inflation is the primary driver of mortgage rates so I might start checking into the BBP price index as a part of my research.

Watching TIPS can be a forecaster for mortgage rates

Posted on by Evan in Economics & Interest Rates

The WSJ ran THIS ARTICLE over the weekend which highlights the recent performance of TIPS versus standard US Treasury debt securities.  “TIPS” is an acronym which stands for Treasury Inflation Protected Security.  The difference between owning TIPS’s and a normal US Treasury note is that with the TIPS’s the US government will compensate the holder for actual inflation thereby paying a guaranteed real rate of return while with the standard US Treasury note the note-holder bears all inflation risk.

So 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 rise as well, including rates on mortgages.

What THIS ARTICLE points out is that over the past couple weeks TIPS’s have outperformed standard US Treasuries after under-performing for the first 9 months of the year.  This is may be an indicator that the markets view of inflation/ deflation is shifting back towards an inflationary bias AND that mortgage rates will soon begin to rise in reaction.  Of course, the market’s outlook can change with new information and we expect the Fed’s post monetary policy statement on November 3rd to be a significant new piece of information.