Inflation news brings mortgage rate spike
By Holden Lewis • Bankrate.com

Mortgage rates went up this week as the threat of inflation stubbornly remained on the scene.

Retail sales were stronger than expected in December, and wholesale prices rose faster that month than had been forecast. And a member of the Federal Reserve's rate-setting committee warned that the central bank continues to watch inflation warily.

These developments, plus a rising stock market, pushed mortgage rates higher.

The benchmark 30-year fixed-rate mortgage rose 2 basis points to 6.26 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.32 discount and origination points. One year ago, the mortgage index was 6.12 percent; four weeks ago, it was 6.2 percent.

The 15-year fixed-rate mortgage hurdled the 6 percent mark for the first time since November, rising 5 basis points to 6.03 percent. The 5/1 adjustable-rate mortgage rose 3 basis points to 6.2 percent.

Weekly national mortgage survey

Results of Bankrate.com's Jan. 17, 2007, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:

Rates have been on a slow but steady incline since early December, when the 30-year fixed stood at 6.08 percent. In the six surveys since then, rates have risen five times; the other time, they were flat.

Most of this week's rise occurred Friday, when the Commerce Department released the retail sales estimate for December. It said that total retail sales went up 0.9 percent -- better than the forecasts of a rise of 0.6 percent or 0.7 percent. And retail sales excluding autos went up 1 percent, about twice what had been expected.

Sales report vs. inflation
Stronger demand leads to higher prices, so investors regarded the retail sales report as potentially inflationary. And it caused at least some investors to shift money from bonds to stocks. The combination of higher inflation expectations, plus reduced demand for bonds, sent bond yields higher, and mortgage rates followed.

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On top of that, Cathy Minehan, president of the Federal Reserve Bank of Boston, and a member of the Fed's rate-setting committee, said this at the beginning of a speech in Vermont: "Inflation has been and remains a challenge, though recent data provide a bit of assurance that price pressures may be beginning to ebb."

The beginning of that sentence, before the comma, got more attention than the end. Later in her speech, Minehan said that the federal funds rate of 5.25 percent is, "in my view, very much in keeping with the risks facing the economy." She didn't sound like she wants to cut the federal funds rate anytime soon. By itself, her speech wasn't enough to send rates upward, but in combination with the retail sales report, it kept rates aloft.

PPI exerts more pressure
Then, on Wednesday, the feds released the producer price index, a measurement of wholesale inflation. It said that overall wholesale prices went up 0.9 percent in December. The consensus prediction had been that the rise would be around 0.5 percent. That exerted more upward pressure on rates.

What about the long-range trend on mortgage rates? This week, the chief economist for the Mortgage Bankers Association weighed in with his prediction. Doug Duncan's forecast calls for the average rate on a 30-year fixed to be around 6.5 percent at the end of the year -- about a quarter of a percentage point higher than now.

Duncan expects refinance volume to remain strong this year as homeowners "dis-ARM" -- that is, replace their adjustable-rate mortgages just before or soon after the first rate adjustment.