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Inflation surge puts pressure on mortgage rates

Shopper amid inflation surge
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Inflation jumped to an annual rate of 8.6 percent in May, the U.S. Labor Department said Friday. That’s one of the loftiest levels since the stagflation days of the early 1980s — and the hot reading means mortgage rates are likely to keep rising in the near future.

“So much for the idea that inflation has peaked,” says Greg McBride, Bankrate’s chief financial analyst. “Consumer prices blew past expectations.”

The unexpected strength of inflation means the Federal Reserve is likely to keep raising rates this year in an effort to contain consumer prices. While the Fed doesn’t directly control mortgage rates, its policies do have an effect.

“Until inflation peaks, mortgage rates won’t either,” McBride says.

Ralph McLaughlin, chief economist at real estate technology firm Kukun, agrees.

“This morning’s news on inflation suggests that mortgage rates aren’t likely to fall any further and are actually likely to rise in the coming months,” McLaughlin says.

During the early part of the coronavirus pandemic, mortgage rates plunged below 3 percent. Rates are now up more than 2 percentage points since the summer of 2021, with inflation a major culprit. Huge stimulus packages fueled consumer spending and created demand for gas, cars and houses. Meanwhile, pandemic-spurred issues in the global supply chain created shortages of many goods. The resulting rising prices have prompted the Fed to take action.

“Inflation is much too high, and we understand the hardship it is causing,” Fed Chairman Jerome Powell told reporters after last month’s central bank meeting.

While the rate of inflation doesn’t directly determine mortgage rates, the two metrics are strongly correlated. Inflation — and the Fed’s response to rising prices — could be the most important factor driving mortgage rates in the coming months.

 

The calculus behind mortgage rates is complicated. The 30-year fixed-rate mortgage closely tracks the 10-year Treasury yield. When that rate goes up, the popular 30-year fixed-rate mortgage tends to do the same. On Friday, the 10-year yield pushed past 3 percent, an indicator that mortgage rates are likely to move up, too.

What you can do

  • Shop around. With mortgage rates poised to keep rising, comparison-shopping is more important than ever. Get at least three quotes.
  • Improve or maintain your credit score. This is the most important factor in determining your rate, so make sure your credit score is as high as possible.
  • Consider a range of loan types. Adjustable-rate mortgages have grown more attractive amid the run-up in rates. If you qualify and don’t plan to stay in the home long-term, this might be a less expensive route.
Written by
Jeff Ostrowski
Senior mortgage reporter
Jeff Ostrowski covers mortgages and the housing market. Before joining Bankrate in 2020, he wrote about real estate and the economy for the Palm Beach Post and the South Florida Business Journal.
Edited by
Mortgage editor