The Producer Price Index (PPI), which measures inflation on the wholesale level, rose by 0.2%, which was half of what economists had expected. On a year-over-year basis, PPI decreased from 8.4% to 8%. Core PPI, which strips out volatile food and energy prices, was flat in October while the annual figure decreased from 7.2% to 6.7%. All of these readings were cooler than expected.

What’s the bottom line? Besides causing higher prices, 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 we’ve seen this year. The Bond market reacted favorably to this cooler inflation report when it was released last Tuesday.