Inflation is back in a big way

Inflation is back in a big way
Written by Publishing Team

Inflation reached 6.8% in November, the highest level since the long-running era of Reaganomics and America’s war on inflation. If prices continue to rise, mortgage rates will go higher as well. But there is a silver lining to this cloud for borrowers, too.

Today’s combination of low mortgage rates and high inflation is extremely rare. So one of those terms is likely to end soon — and if prices stay high, economists say, mortgage rates will go up.

“Inflation tends to push up mortgage rates, so I expect we head into the new year at higher rates than we finished 2021,” says Ralph McLaughlin, chief economist at

Last week’s inflation reading of 6.8% was the highest point in 39 years, with little respite in sight. Consumer prices are poised to continue rising, says Frank Nothaft, chief economist at real estate data firm CoreLogic.

This means that mortgage rates will definitely rise. “We will see continued upward pressure on prices,” Nothaft says.

Since the annual rate of inflation exceeded 4% in the spring and then 5% this summer, the Federal Reserve described this phenomenon as “ephemeral.”

The early analysis of central bankers went something like this: The global economy hit the brakes in March 2020. Consumers stopped eating out, traveling, and engaging in other typical spending patterns, causing a period of deflation. At the same time, the federal government has filled consumer bank accounts with stimulus money, paving the way for higher prices once the pandemic lockdown is eased.

As economic activity returns to normal, the thinking is gone, prices will inevitably rise. After all, annual inflation is just a comparison to prices a year ago. And consumers this year are spending more than a year ago. But once the consumers have spent themselves, the temporary argument is gone, and everything will return to normal.

This is not what happens, though. There are still shortages of all kinds of merchandise, including cars, appliances, and building materials. The Fed no longer describes inflation as temporary.

CoreLogic’s Nothaft views inflation as a threat to historically low mortgage rates, and sees signs that inflation will be with us for a while. Yes, it is possible that supply chain problems will finally go away, slowing the growth of prices for cars, lumber, and other items. But these goods are only part of the inflation index. The federal measure of consumer prices also includes housing and health care — none of these items will see a drop in prices when auto production returns to normal and backups run out in port.

“This makes it very difficult to get inflation back to the Fed’s 2% target,” says Nothaft.

Right now, the unusual combination of high inflation and low mortgage rates makes borrowing more attractive. That’s because if long-term rates don’t go up as prices go up, the “real” cost of paying off a mortgage today is getting cheaper over time.

Simply put, inflation is generally good news for borrowers, especially those with mortgages. You can pay off the loan in cheaper dollars, which reduces the cost of borrowing.

The inflation picture is important for mortgage rates because it may force the Fed to do so. If inflation continues to rise, the Fed will have to raise interest rates in 2022. Indeed, on Wednesday, he expected to raise rates three times next year.

Mortgage rates, which are closely related to 10-year Treasury bills, are not controlled by the central bank. While the Fed’s decisions don’t directly drive mortgage rates as they do with other products, such as savings accounts and CD rates, the Fed’s actions indirectly affect the rates consumers pay on their fixed-rate mortgages.

“Mortgage rates move based on long-term bond yields,” says Greg McBride, chief financial analyst at Bankrate. “If investors believe that inflation will stabilize and not be a long-term problem, this leads to a more muted response in mortgage rates despite the ugly inflation numbers we are currently seeing.”

In other words, a sharp rise in mortgage rates is not a sure thing. But the jump in consumer prices certainly makes price hikes more likely.

“Rising inflation is prompting the Fed to change course, no longer referring to it as temporary, presumably doubling its tapering pace at this week’s meeting,” says McBride. Inflation is a problem in the short term, but if the Fed works to rein it in, it won’t be a problem in the long term, and it won’t necessarily lead to higher mortgage rates. But the Fed’s credibility is key – and its credibility has taken a hit recently.”

A real estate sign is seen in front of a home for sale in West Los Angeles on November 19, 2020. Two years later and a pandemic after that, mortgage rates may soon rise.

What does this mean for borrowers and mortgages

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