The Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation increased 0.4% in April, while the year-over-year reading ticked higher from 4.2% to 4.4%. Core PCE, which strips out volatile food and energy prices, also rose by 0.4% with the year-over-year change up from 4.6% to 4.7%. All these readings were hotter than expected, as energy prices and used cars pressured inflation higher.

What’s the bottom line? Inflation is the arch enemy of fixed investments like Mortgage Bonds because it erodes the buying power of a Bond's fixed rate of return. If inflation is rising, investors demand a rate of return to combat the faster pace of erosion due to inflation, causing interest rates to rise like we saw throughout much of last year.

While inflation moved in the wrong direction in April, the coming months will likely see nice progress made toward lowering inflation. This is because inflation is calculated on a rolling 12-month basis, so the total of the past 12 monthly inflation readings gives us the year-over-year rate of inflation. Headline inflation last year was 0.6% in May and 1% in June, so if we continued to see 0.4% readings over the next two reports, year-over-year inflation would drop from 4.4% to 3.6%.