The Consumer Price Index (CPI), which measures inflation on the consumer level, showed that inflation increased by 0.5% in January. On an annual basis, inflation declined from 6.5% to 6.4%. While the monthly reading was in line with estimates, the year-over-year figure was hotter than expectations. Core CPI, which strips out volatile food and energy prices, rose 0.4% while the year-over-year index decreased from 5.7% to a hotter than forecasted 5.6%.

In addition, shelter costs make up 43% of Core CPI and they rose 0.7% in January, meaning they played a big role in the overall 0.4% monthly gain in Core CPI. However, shelter costs have been lagging in the CPI report, as they have been coming down in more real-time data. Once these moderating shelter costs are reflected in the CPI data, they should add additional downside pressure to inflation. 

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 as they did throughout much of last year. Since lower inflation typically helps both Mortgage Bonds and mortgage rates improve, these signs of easing inflation are welcome, mild though they were.