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Changing the Consumer’s Mindset on Inflation

More good news on inflation was reported this morning, with the Producer Price Index (PPI) showing that wholesale inflation rose by only .2% last month.

This was well below the .4% growth rate the market was anticipating. Unlike the consumer inflation reports that are far more closely watched, the PPI measures inflation on the wholesale or producer level.

Since an increase in the cost to produce goods is eventually passed on to the end consumer, it is progress to see the pace of PPI moderate to more acceptable levels than we have experienced over the past 12 months.

American hedge fund manager and CEO of Citadel, Ken Griffin, stated in a recent interview that he believes we have seen inflation peak. However, given the way in how Owners’ Equivalent Rent is estimated and calculated, he believes there will still be upward pressure shown in near-term reports.

He added that spot rental rates appear to have peaked in major metropolitan areas a few weeks ago. So, with rent being one of the biggest drivers of overall inflation, we will see the consumer inflation reports moderate in the months to come.

Griffin believes that the Fed should continue to push the Fed Funds rate higher until psychological inflation expectations are back to near the 2% Fed target rate. The fear is that when consumers expect high inflation, they will take that mindset into salary negotiations, which then creates a self-fulfilling prophecy. Higher wages are in themselves inflationary.

Therefore, the Fed needs to continue tightening until consumers believe that inflationary pressures are a thing of the past.

Yields on the 10-Year Treasury Note are fighting an important battle with its 50-day moving average. If this battle is won, that victory could spill over into the mortgage bond market.

The general rule would state that this is an opportunity to lock. However, if you choose to take the risk, you can float if you able to closely monitor the bond market.