The Mortgage Market's Curious Reaction to July's Producer Price Index Reading

The Producer Price Index is an indicator of business inflation and it's now up 9.8 percent annually.

This is a huge number for PPI and represents the highest year-over-year rate of inflation since 1981.

Normally, astronomical inflation like this would be terrible for mortgage rates, but interest rates are actually better since Tuesday's data release.

Usually, a rocketing PPI would create an expectation of inflation on Wall Street, which would, in turn, cause mortgage rates to rise.

That's not what happened, however.

Yestereay, upon the PPI release, Wall Street looked at the 9.8 percent number and simply yawned. "Of course PPI is high," traders thought. "Did you see how high energy costs were last month?"

Traders know that in July, oil prices reached an all-time high of $147.27 per barrel and, since then, crude is down more than 20 percent. Because of this, Wall Street has now turned its attention to the August PPI data, thinking it will be tamer than July's.

In other words, instead of fearing inflation, traders believe the worst of it is over, providing an unexpected boost to home buyers in need of mortgages. As inflation expectations fall, mortgage rates are following suit.