Consumer Inflation: Highest Levels Since 1981

The Consumer Price Index (CPI), which measures inflation on the consumer level, rose by 1.2% in March. This pushed the year-over-year reading higher from 7.9% to 8.5%, which is the hottest reading in 41 years.

Core (CPI), which strips out volatile food and energy prices, rose by 0.3%. As a result, year over year Core CPI increased from 6.4% to 6.5%, which was a bit less than anticipated. The headline inflation jump was expected due to rising oil and food prices, but the Core reading was cooler than anticipated and garnered a positive reaction in the Bond market when the data was released last Tuesday.

Within the report, rents rose 0.4% in March and increased from 4.2% to 4.4% on a year-over-year basis. While this data has started to increase, the CPI report is still not capturing the double-digit increases year over year that many other rent reports are showing.

Owners’ equivalent rent also increased by 0.4% and the year-over-year figure rose from 4.3% to 4.5%. However, note that this data is based on a survey that asks homeowners, “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished, and without utilities?” Understandably, this is very subjective and many people would be guessing these amounts so while this data tries to capture the rise in home prices, it does a poor job.

Some other notable price increases since last year include food (+9%), gasoline (+48%), and used cars (+35%).

Why is rising inflation significant?

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.