Inflation, it's safe to say, is the credit markets' number one concern. And why wouldn't it be? Last week, the consumer price index exceeded most economists' expectations, and this week the producer price index did the same, except it blew past expectations. On that blustery front, the PPI increased 1%, more than double the consensus estimate, while the core PPI, which excludes food and energy, increased 0.4%.
Federal Reserve Chairman Ben Bernanke further fanned inflationary flames when he told Congress that the Fed will do whatever it takes to stop the credit squeeze – the result of turmoil in the mortgage-backed securities market – from becoming a recession. In short, the Fed has essentially shifted gears from maintaining price stability to maintaining economic growth – a legitimate shift, to be sure, considering that gross domestic product slowed to a snail-like 0.6% pace in the October-to-December quarter.
But perhaps the Fed should be as concerned with price stability as the credit markets are. The most-followed inflation indicators have all hit new highs in recent weeks: Oil has surged to $102 a barrel (as recently as September it was $70), gold has surpassed $970 an ounce, the Euro has broached $1.50 for the first time, and many commodity prices have hit record highs.
Unfortunately, oil, gold, et al. haven't been moving higher alone; mortgage rates have been moving higher too. In the past two weeks, rates across the board have shot up 50 basis points (half a percentage point) or more. Freddie Mac's latest survey has prime, conforming loans averaging 6.24% on the 30-year fixed-rate mortgage, 5.72% on the 15-year fixed-rate mortgage, and 5.43% on the five-year Treasury-indexed hybrid adjustable-rate mortgage. The good news is that rates are still lower than they were this time last year.
Eric P. Egeland