What Inflation Data Means for Mortgage Rates (2024)

What’s inflation got to do with mortgage rates?A lot, according to housing market experts.

This week’s release of the Consumer Price Index for February, which measures changes in the cost of food, housing, gasoline, utilities and other goods, showed inflation rising by 3.2% over the past 12 months. Markets and experts had expected the figure to be around 3.1%.

Historically speaking, when inflation rises and falls, mortgage rates tend to follow it, said Logan Mohtashami, lead analyst at HousingWire. “Although the growth rate of inflation has cooled down recently, mortgage rates are still very elevated as the mortgage market is still dealing with stress,” he said.

Cooler inflation and interest rate cuts from the Federal Reserve should help mortgage rates fall this year. But sticky inflation data could be another bump in the road to get there.

How does inflation affect mortgage rates?

Inflation makes basic goods and services more expensive and causes the value of the dollar -- and your purchasing power -- to decrease.

While inflation doesn’t have a direct influence on mortgage rates, it impacts the bond market where mortgage rates are determined. High inflation curtails investor demand for mortgage-backed securities, causing prices for those bonds to fall and mortgage rates to increase.

Inflation is controlled by the Federal Reserve’s monetary policy, particularly via adjustments to the federal funds rate. To temper inflationary pressures and slow the economy, the Fed has increased interest rates 11 times over the last two years, helping bring inflation down from its 2022 peak at 9.1%.

That aggressive rate-hike strategy has also had an indirect but notable impact on the mortgage market, causing home loan rates to surge to record levels.

Ultimately, mortgage rates are affected by an array of market factors, such as inflation and bond yields, as well as by personal financial factors, such as your credit score and income.

“If inflation is easing, so will mortgage rates, although not necessarily at the same speed or depth, since there are other contributing factors that go into the consumer’s final rate,” said Keith Gumbinger, vice president of mortgage site HSH.com.

What does the inflation rate mean for home prices?

Though inflation affects the mortgage market, there’s not a linear correlation with home prices. For example, home prices have been rising faster than inflation: In January 2024, they were up 5.1% compared to last year, according to data from Redfin.

Also, when mortgage rates are high and there’s less demand for houses, it can sometimes cause home prices to go down. But that’s not happening in today’s market -- home prices have remained high due to a lack of inventory.

And while home prices and rental costs often move in lockstep, other times they don’t. The affordability (or lack of affordability) of the housing market can depend on mortgage rates, construction costs and many other variables.

February’s Consumer Price Index measured shelter costs increasing at a rate of 5.7% year over year. According to Rob Cook of Discover Home Loans, the CPI measure of shelter includes three components: the amount consumers are paying for rent; the cost of lodging expenses outside of the home, such as hotels; and the amount a homeowner would be willing to rent their house.

In other words, the shelter index in the monthly inflation report doesn’t directly measure the change in home prices and isn’t based on the outright value of homes. It measures housing prices based on their potential rental value (also known as owners’ equivalent rent).

“The CPI is a measure of the prices of a basket of goods and services that consumers buy,” said David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. “When the value of my house goes up 10%, I am richer, but that doesn’t raise the cost of the basket of goods and services that I consume.”

What does inflation data mean for mortgage rates?

Mortgage rates are predicted to fall over the year. Most major housing authorities call for the average rate on a 30-year fixed mortgage to end 2024 near 6%, almost a full percentage point lower than it is today.

But those forecasts are linked to expectations for cooler inflation and a lower federal funds rate.
Since the start of the year, there have been a few hiccups. In February, strong inflation and employment data pushed average mortgage rates back above 7%. So far In March, the average interest rates on home loans have held mostly steady between 7% and 7.25%, though rates have recently started moving lower.

Because February’s data was slightly higher than expected (due largely to an uptick in gas prices), we could see mortgage rates move up in the near term. Higher inflation may bolster the argument that some Fed officials have for waiting longer to cut interest rates, according to Wessel.

When will the Fed cut interest rates?

The central bank’s Federal Open Market Committee meets next week, from March 19 to 20. Because inflation has been showing consistent signs of cooling, the Fed isn’t expected to implement another interest rate bump.

But since inflation is still above the Fed’s 2% annual target rate, investors will be paying close attention to how the Fed reacts to the most recent inflation report and whether it drops any hints about the path toward rate cuts this year.

The timeline for Fed interest rate cuts is dependent on economic data, particularly lower inflation and a weaker labor market (translating to slower wage growth, a higher unemployment rate or both). Three more inflation reports will be released before the June 11 to June 12 FOMC meeting, which is when many experts expect the Fed to implement the first rate cut.

“The Fed should have cut rates already. However, June right now is the best guess,” said Mohtashami. “If the economic data gets weaker or inflation falls faster than they think, May is a good starting point.”

Though we could see interest rate cuts before summer, data from the past few months points to a much more resilient economy than many were expecting. Aside from the housing market, the economy hasn’t been suffering under the weight of steep interest rates, according to Gumbinger, so the Fed isn’t in a hurry to trim rates quickly or drastically.

Regardless of when the Fed decides to start lowering interest rates, though, don’t expect an immediate or dramatic decline in mortgage rates.

“Any changes will be modest and gradual,” said Cook. “No one should expect a return to the historically low rates we saw back in 2020 to 21.”