Inflation Watch: How the Consumer Price Index (CPI) Affects Your Mortgage Rates
Updated: Nov 28
Welcome to our latest newsletter, where we will be discussing the Consumer Price Index (CPI) and its impact on mortgage rates.
The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by consumers for a basket of goods and services. This basket includes items such as:
Food and beverages (13%)
Housing (rent, shelter, and utilities) (40%)
Apparel (around 3%)
Transportation (fuel, motor vehicle insurance, public transportation) (15%)
Medical care (6%)
Recreation (5%)
Education and communication (4%)
These items are grouped into eight categories, each with a different weight depending on their importance in household expenditure. The CPI is used to measure inflation, which is the rate at which the overall level of prices for goods and services is rising.
As you can see, housing, which includes shelter, makes up the largest percentage of the basket of goods at around 40%. This is why shelter inflation is a key component of the CPI, as changes in housing costs can have a significant impact on overall inflation.
Now, how does this relate to mortgage rates? As you may know, mortgage rates are closely tied to the overall level of interest rates in the economy. When inflation is high, it puts upward pressure on interest rates, which in turn can lead to higher mortgage rates. This is because lenders want to be compensated for the risk of inflation eroding the purchasing power of the money they lend.
So, if the CPI is rising, it can be an indication that inflation is increasing, which could lead to higher mortgage rates in the future. On the other hand, if the CPI is falling, it may indicate that inflation is decreasing, which could lead to lower mortgage rates.
It's important to note that there are many factors that influence mortgage rates and inflation, and the direction and magnitude of these changes can be difficult to predict. However, the CPI is an important indicator to watch as it can provide insight into the overall economic conditions and how they may affect mortgage rates in the future.
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