Mortgage Rates Soar to 10-Week High on Hotter-Than-Expected Inflation

Mortgage rates have jumped as inflation data came in higher than expected this week, suggesting inflationary pressures persist.

A 'For Sale' sign stands outside a home on the market along Nevada Avenue in the Old North End neighborhood of Colorado Springs, Colo., on June 22, 2023. David Zalubowski/AP Photo

U.S. mortgage rates shot up to a 10-week high this week as hotter-than-expected inflation data challenged the narrative that the economy is in a steady disinflationary trend.

The 30-year fixed-rate mortgage rose to 6.77 percent from 6.64 percent last week, according to mortgage buyer Freddie Mac.

Borrowing costs on 15-year fixed-rate mortgages also rose, pushing the average rate to 6.12 percent from 5.90 percent last week.

The rise in mortgage rates came as the 10-year Treasury yield spiked after a hotter-than-expected retail inflation report earlier this week, and again on Friday, after wholesale prices rose more than expected.

“On the heels of consumer prices rising more than expected, mortgage rates increased this week,” Freddie Mac said in a statement.

Mortgage rates are closely tied to the yield on 10-year Treasury note, which surged by around 15 basis points, to 4.32 percent, on Tuesday after January consumer price inflation data came in higher than expected.

While Treasury yields fell on Thursday to around 4.244 percent on weaker-than-expected retail sales data, yields again jumped to 4.295 percent on Friday to after wholesale inflation data came in stronger than expected.

Housing Slump

Rising mortgage rates can add hundreds of dollars in monthly costs for borrowers, potentially slowing homebuyer demand. They also discourage homeowners who locked in low rates several years ago from selling. Two years ago, the average rate on a 30-year mortgage was around 3.92 percent.

So far in 2024, mortgage applications to buy a home are down in more than half of all states compared to a year earlier, according to Freddie Mac.

The U.S. housing market has been in a slump for the past two years due to elevated mortgage rates and a shortage of housing supply. In 2023, sales of previously owned homes fell to nearly a 30-year low, down nearly 19 percent from the prior year.

Pending home sales in January were down 8 percent, the biggest decline in four months, according to Redfin, which blamed a hotter-than-expected January jobs report, which fanned inflationary fears, suggesting that the Federal Reserve might keep interest rates higher for longer.

Faced with soaring inflation, the Federal Reserve began to boost rates at a fast pace starting in March 2022, taking the benchmark overnight federal funds rate to its current range of 525–550 basis points, or 5.25–5.50 percent.

While Fed officials have said they see inflation coming down slowly but steadily toward the central bank’s target of 2 percent, they’ve warned that the battle to quash price pressures is far from over and interest rates may have to stay higher for longer.

Freddie Mac chief economist Sam Khater said in a statement that economic indicators suggest that the Fed is unlikely to cut rates soon.

“The economy has been performing well so far this year and rates may stay higher for longer, potentially slowing the spring homebuying season,” he said.

Inflation in Focus

Annual inflation hit a recent peak of 5.5 percent in March 2022, according the central bank’s go-to inflation gauge, the core Personal Consumption Expenditures (PCE) measure.

Core PCE fell to 2.9 percent in December, dropping below 3 percent for the first time since March 2021.

Meanwhile, the headline Consumer Price Index (CPI) inflation gauge, which the government uses to make the cost of living adjustments to benefits like Social Security, hit a recent peak of 9 percent in June 2022.

The CPI inflation measure fell to 3.1 percent in January, a decline from the 3.4 percent notched in December but higher than the 2.9 percent markets expected.

“Inflation—it’s like trying to lose 20 lbs. The first 10 come off like butter. The last 10 are a root canal,” Lawrence McDonald, former head of macro strategy at Société Générale, said in post on X, commenting on the hotter-than-expected inflation number.

Perhaps the biggest negative surprise in Tuesday’s CPI print was that the core month-over-month pace of inflation came in at 0.4 percent, higher than the 0.3 percent markets expected.

The core measure strips out food and energy and is considered a better gauge of “sticky” price pressures.

“A 0.4 percent outcome would be a huge negative surprise, one that would likely cause the probability for a May cut to move comfortably south of 50 percent,” ING analysts wrote in a note. “That would throw the easing inflation story up in the air, bringing U.S. Treasury yield with them.”

The analysts’ prediction, made a day before the CPI data release, proved accurate, as the 10-year Treasury note yield soared above the psychological barrier of 4.3 percent.

But even a monthly core CPI reading of 0.3 percent (which would have been in line with expectations) would have been problematic as that would annualize to 4 percent, which ING analysts argued would be “clearly too high.”

Wholesale inflation data released on Friday painted a similar picture, coming in higher than expected.

The Producer Price Index (PPI), which measures prices received by producers of goods and services, rose 0.3 percent month over month in January, according to data from the Bureau of Labor Statistics (BLS). Economists polled by Dow Jones expected a 0.1 percent rise.

That’s the biggest move up since last summer and is also a directional shift as the month-over-month PPI inflation measure fell 0.1 percent in December.

The core PPI measure soared 0.5 percent in month-over-month terms in January. Economists polled by Reuters expected a 0.1 percent increase.

The PPI numbers revived fears of resurgent inflation.

“Inflation, higher for longer,” Crescat Capital partner and macro strategist Otavio Costa wrote in a post on X, while sharing a chart showing three inflationary waves of the 1970s, while hinting that, in the current time, two more even bigger waves of inflation may be coming.

By contrast, the idea that inflation will rear its ugly head again in a meaningful way is not a view shared by Treasury Secretary Janet Yellen, who commented on the higher-than-expected CPI numbers earlier in the week by insisting that, “inflation, overall, is coming back down to normal levels where it’s not an issue to most people.”