The Producer Price Index (PPI), which measures inflation on the wholesale level, fell by a greater than expected 0.5% in December. On a year-over-year basis, PPI decreased from a downwardly revised 7.3% to 6.2%. Core PPI, which strips out volatile food and energy prices, was in line with estimates with a 0.1% increase, though the previous report was revised lower. On an annual basis, Core PPI declined from 6.2% to 5.5%.

What’s the bottom line? Overall, inflation continues to subside and the annual readings are moving lower in the right direction. In fact, the progress made on the producer side of inflation is notable. At its peak last March, PPI was at 11.7% year over year and is now almost half that amount at 6.2%.

Cooling inflation is a welcome sign for several reasons. 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 saw through much of last year.