The Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation increased 0.6% in January, while the year-over-year reading rose from an upwardly revised 5.3% to 5.4%. Core PCE, which strips out volatile food and energy prices, rose by 0.6% with the year-over-year change increasing from an upwardly revised 4.6% to 4.7%.

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. While inflation had been trending lower, this report was a disappointment as both year-over-year readings were above estimates and moved higher in the wrong direction. Hopefully, February’s report will be friendlier when it is released in March.