Feelin' Hot.. Hot.. Hot!

The summer may be over, but some parts of the economy are just starting to heat up. One economic indicator that has come in hotter lately is inflation. At the end of September, the final reading of GDP in the 2nd Quarter showed inflation at 2.5%, which was up from the previous reading of 2.4%.

That elevated inflation reading was released on the heels of a hot Core Consumer Price Index (CPI), which has risen steadily and jumped to the upper-end of the Fed’s comfort level in the latest release.

Although Fed Chair Ben Bernanke stated a couple weeks ago that inflation has "moderated" of late and should continue to do so, there are still some reasons for concern. For example, we are experiencing an unprecedented amount of stimulus and low rates, which is something never seen before in history.

So why is this significant?

The concept is simple: If inflation rises, investors in Bonds demand a higher yield to offset the lost buying power inflation imposes on a fixed payment. And as home loan rates are tied to Mortgage Bonds, this would mean home loan rates move higher.

Once inflation starts to emerge it can manifest rather quickly. Future inflation readings will be closely watched to see if a trend higher is emerging, and last month’s elevated number will certainly heat up the debate surrounding more stimulus, as more money into the system fuels inflation further.

If inflation heats up even more, the Fed will likely back off their "low rates until mid-2013" mandate. Inflation really does change everything, so the markets will continue to follow this story closely.