How Rising Inflation Affects Mortgage Interest Rates

Rising inflation can shrink purchasing power as prices of goods and services increase. Higher prices can then influence the Federal Reserve’s interest rate policy, affecting the cost of borrowing for lending products like mortgages.

Understanding the difference between the inflation rate, interest rates, and what affects mortgage rates matters for all home finance consumers.

When inflation is on the rise and the economy is in danger of overheating, the Federal Reserve may raise interest rates to cool things down. Interest rates reflect the cost of using someone else’s money. Lenders charge interest to borrowers who take out loans and lines of credit as a premium for the right to use the lender’s money.

Inflation Rate vs Interest Rates

There can be indirect effects because of how inflation influences the economy and the Federal Reserve’s monetary policy decisions. Again, this relationship between inflation and mortgage rates is related to how the Federal Reserve adjusts interest rates to cool off or jump-start the economy.

What Affects Mortgage Rates?

In March 2022, the U.S. inflation rate hit 8.5%, as measured by the Consumer Price Index. This increase represents the largest 12-month increase since 1981 and moving well beyond the Federal Reserve’s 2% target inflation rate. While prices for consumer goods and services were up across the board, the most significant increases were in the energy, shelter, and food categories.

Inflation Trends for 2022 and Beyond

Rising inflation and higher interest rates have caused mortgage rates to spike at the fastest pace in decades, though mortgage rates are still near historic lows. As the Fed continues to pursue interest rate hikes, it could lead to even higher mortgage rates. It simply means that if you’re interested in buying a home, it could make sense to do so sooner rather than later.

Is Now a Good Time for a Mortgage or Refi?

Swipe up to learn more!