The Breakdown:

Possibly the biggest news in the market at the moment is the August Consumer Price Index (CPI) report. Last month, inflation increased by 0.1%, bringing year-over-year inflation down to 8.3% (from 8.5%). The Core rate, after removing food and energy prices, showed an increase of 0.4%.

The cost of Rent prices rose 0.7%, bringing them to an increase of 6.7% year-over-year. In addition, Food prices increased by 0.8%, reaching an increase of 11.4% year-over-year. And while Gasoline prices fell by 11%, we're still looking at an increase of 26% year-over-year. Another unfortunate effect of inflation is the explosion in credit card debt, which has increased by 15% year-over-year at a rate of about $33B per year.

So now that the entire country is feeling it, what can be done about it?

Jerome Powell, Fed Chair, repeated the Fed's commitment to fighting inflation and is expected to announce another hike its benchmark Fed Funds Rate by an additional 75 basis points after it's meeting next week. Although it can seem a bit counterintuitive, Fed rate hikes are usually beneficial for the Mortgage Bond market when they are expected to lower inflation. Unfortunately, Mortgage Bonds reacted poorly to Powell's comments, likely because it is clear that the Fed lacks confidence in its ability to get inflation back under control quickly.

That being said, there are some signs that inflation will move lower later this year, especially if the Fed’s rate hikes take hold of the economy. First, goods account for 40% of the Consumer Price Index and we have seen a big decline in many commodity prices from their peak. Take lumber and wheat for example, down 66% and 44% respectively. Second, inflation is calculated based on a cumulative 12-month reading. Since rates last fall were higher than in the summer, we could see this reading drop provided this fall delivers lower rates.

The hottest news of the week is undoubtedly the CPI Inflation reading that was reported yesterday and the Producer Price Index (PPI) numbers, measuring wholesale inflation, that will be reported today. Later this week, we'll receive some Retail Sales and Manufacturing data for the northeast region, which will provide some important insight into the future of our economy. Stay tuned!