Mortgage Rates Just Hit Their Highest Point of the Year and Here Is What Is Driving Them Higher

A Rate Update That Buyers and Homeowners Need to Understand Right Now

Mortgage rates climbed to their highest levels of the year this week and the story behind that move is worth understanding clearly because the same forces that pushed rates higher this week will continue to shape the rate environment in the weeks ahead.

Oil Prices Are Once Again Driving the Rate Movement

Higher energy costs were a major factor in the rate increase this week and the mechanism behind that connection is consistent with what has been driving rate volatility throughout the year. When oil prices rise the cost of transporting goods, manufacturing products, and running businesses all increases. Those elevated costs spread through the economy and feed directly into inflation. When inflation rises or when inflation expectations increase bond yields move higher and mortgage rates follow.

What the Inflation Data Is Actually Showing

Consumer inflation rose at 3.8 percent year over year which is a meaningful increase that reflects the broad upward pressure that energy costs are creating across the economy. Core inflation which excludes food and energy also moved higher which is the reading that often gets the most attention from the Federal Reserve because it strips out the volatile components and focuses on the underlying trend.

Wholesale inflation showed a significant jump as well indicating that businesses are absorbing rising input costs that have not yet fully passed through to consumer prices. When wholesale prices rise the expectation is that consumer prices will continue to move higher in the months ahead as businesses pass those costs along.

One of the most important data points in the current inflation picture is the relationship between inflation and wages. As Tom Seaman explains inflation is now rising faster than wages which directly impacts affordability for a significant number of households. When prices increase more quickly than income the purchasing power of every dollar earned decreases and the ability to manage a monthly mortgage payment alongside other rising costs becomes more challenging across a broad range of household budgets.

What the Consumer Spending Data Is Telling Us

Retail spending remains solid overall which suggests the broader economy is still functioning despite the inflationary pressure. But the data is starting to reveal a split in consumer behavior that is worth paying attention to as a signal of where stress is building in the economy.

Higher income households are continuing to spend at a relatively consistent pace. Lower income consumers are pulling back in ways that reflect the pressure of rising costs outpacing income growth. That divergence is a pattern that historically precedes broader economic softening and it is one of the data points that the Federal Reserve and bond markets will be watching closely in the months ahead.

What to Watch Going Forward

The forces driving the current rate environment are not going to resolve quickly or cleanly. Oil prices will continue to respond to global events including the ongoing situation in the Middle East. Inflation data will continue to reflect the cumulative effect of those energy costs working through the supply chain. The Federal Reserve will continue evaluating whether the current inflation trajectory requires a policy response or whether patience is still the appropriate posture.

Markets will be watching all of those inputs closely for signals about where rates are heading next. Buyers who are actively shopping should build a rate cushion into their budget numbers and stay in close contact with their loan officer for updates as conditions develop.

Tom Seaman monitors these developments on an ongoing basis and works with buyers to build purchasing strategies that account for the current rate environment rather than assuming stability that may not materialize. Reach out to Tom Seaman to understand what current rates mean for your specific situation and how to position yourself to act when conditions improve.

Sources

FederalReserve.gov BureauOfLaborStatistics.gov MortgageNewsDaily.com CNBC.com EnergyInformationAdministration.gov