Inflation Data Higher Than Expected: Are Higher Mortgage Rates on the Horizon? Why Buying or Refinancing Now Might Be Your Best Financial Move This Year

Economists follow all sorts of economic data. Some data they follow more closely than others and some reports quite frankly are mostly ignored. These reports are released at varying times of the month and economists as well as investors across the board anxiously await these numbers as an indication of the health of the economy. These reports come from a variety of sources that range from entities such as the National Association of Home Builders which provides regular numbers on new housing starts among other construction data. The National Association of Realtors puts out its own version of existing home sales. The federal government also has its fair share of economic data and hands down reports the bulk of these numbers each and every month, quarter and year.

When investors read these reports they’re paying less attention to what has already happened but more so in trying to decipher the tea leaves these numbers provide, getting an idea on what the economy will be doing three months from now, six and next year. If the economy appears to be moving right along in a positive direction then it follows that consumer spending will pick up as consumers feel more confident about the economy. Consumer spending has perhaps the largest impact on the economy and is closely watched. Among these various reports, which ones have the greatest immediate impact on markets today?

What Impacts the Economy

One of the more closely watched reports is the Gross Domestic Product, or GDP that is released once per quarter. The GDP numbers is the sum total of all goods and services produced in the previous three month period. Another important report that is carefully examined is the Unemployment Report and the various sub-reports within these monthly numbers. These jobs numbers are released on the first business Friday of each month, reflecting employment from the previous month. Interestingly though, the actual unemployment rate is not the most important piece of data. Certainly the unemployment rate can’t be ignored and is a general indicator on the strength of the economy but the more important piece of information to be scrubbed is job creation. How many new jobs were created last month? This particular report examines various sectors within the economy such as manufacturing, health care and mining for example. Each sector is picked apart for any clues about the economy down the road.

Investors can get an idea of the performance of the economy three to six months out and can make investment decisions based upon that data. An historical “buy low, sell high” strategy. For example, let’s say that the manufacturing sector reported a surprisingly strong number of new jobs created. Regardless of the product being manufactured, at some stage that product will be delivered to the retail sector for purchase. When factories are running at full speed their internal metrics tell them they will be able to sell what they produce.

Businesses of all types buy the things they need in order to be in business. If it’s a factory and a new metal press is needed, that purchase is counted and reported. So too are everyday office equipment such as computers and document management systems. Within these numbers is another important piece of information referred to as the Durable Goods Shipments. Durable goods are items that are not produced for immediate purchase and consumption by a consumer and kept over a longer period of time. Durable goods include consumer electronics, furniture, and sporting equipment for example.

Other important sectors that have a greater impact on the economy than others include Housing, Wholesale and Retail Trade and Energy.

A Few Other Factors

Okay, now let’s say that most if not all of these individual reports are coming out as positive news for the economy. America’s factories are running at nearly full capacity, shipping durable goods out as fast as they can be produced. Unemployment is strong as fewer people are out of work and more are out looking for work. 275,000 new jobs were created last month and companies are having a harder time finding employees. And that’s where we get into the inflation number.

When businesses are forced to pay higher wages to keep their businesses running that’s a positive sign. Employees make more money and feel confident about their prospects for long term employment. This confidence allows them to spend more than they did perhaps a year ago when they felt less confident and the jobs numbers were somewhat disappointing. Higher wages and more consumer spending at some stage means businesses can charge more for the very same goods or services. More demand means higher prices, less demand can result in lower prices.

As consumers continue to spend and jobs numbers are still strong, soon it will cost more to buy the very same product today than it did a year ago. Inflation has arrived both at the wholesale and retail levels. Manufacturers can charge their distributors more who can then charge their consumers more. The dollar is now worth less than it used to be because you need more dollars to buy the very same product or service. At some stage, the Fed gets a little nervous and starts a campaign to keep raise the cost of funds to ward off any future inflation. When money costs more, lenders and consumers borrow less which can mean less consumer spending.

Recent inflation numbers have been on a higher than expected trajectory as of late. For January, the month-to-month retail inflation number was pegged at 0.5%, much higher than expected with the annual CPI number coming in at 2.1%, higher than the 1.9% most economists anticipated. These signs of inflation, if sustained, will certainly cause the Federal Reserve to start raising rates sooner rather than later.

What’s Next

All this points to the fact that if you’re thinking of refinancing your current mortgage, either to get a lower rate or switch out of your hybrid and into a fixed, it’s probably time to get started with that. And if you’re getting ready to buy and finance your next home, you might want to get started a little sooner than you might have expected.