Despite lower prices at the gas pump, the Consumer Price Index increased a little bit more than expected in June.
According to the Bureau of Labor Statistics, CPI rose 0.2% versus the 0.1% expected by economists
CPI tries to answer the question “How expensive is everyday life?”. Over the last 12 months, says the government, “life” is 2.7% more expensive.
Normally, this would cause mortgage rates to increase for rate shoppers but today the normal increase is being offset by two other factors:
- If we exclude the typically-volatile prices of food and energy, CPI increased 0.2% and that met economist expectations
- Federal Reserve Chief Ben Bernanke testified to Congress today that the economy is expanding “at a moderate pace”, making it less likely that the Fed will raise the Fed Funds Rate in 2007.
Big Ben’s words always carry a big stick in the markets and especially today as markets look ahead to tomorrow’s release of the FOMC meeting minutes from June 28. The minutes will highlight the debate and conversation that eventually led to the Fed’s press release.
If the minutes reveal that the Fed is fearful of inflation, mortgage rates will rise in response. This is because inflation devalues bond payments and mortgage rates are based on the value of mortgage bonds.