Inflation: The Latest Threat to Mortgage Rates

Mortgage rates have been rising in recent months, and the impact is already being felt via a drop-off in mortgage application activity. This impact could get even more severe in the wake of a recent inflation report.

On July 16, the Bureau of Labor Statistics announced that the Consumer Price Index (CPI) climbed by 0.5 percent in June, which would translate to just over 6 percent annually. Month-to-month inflation numbers tend to be erratic, but what's troubling about June's inflation is that it was fueled primarily by gasoline prices -- and those prices show no sign of easing. Since mortgage lenders are very sensitive to the threat of inflation, this rise in the CPI could lead to another wave of mortgage rate increases.

Mortgage conditions could get tougher for consumers

Consumers were already feeling the pinch of higher mortgage rates. On July 17, the Mortgage Banker's Association reported that mortgage application activity was down yet again over the past week. That makes 10 out of the past 11 weeks in which mortgage application volume dropped, a reflection of the rising interest rate environment over that time.

Rising rates have had a particular effect on refinancing. Refinancing applications are now down to 63 percent of the total, their lowest level since 2011. If inflation drives mortgage rates even higher, it could start to discourage new buyers as well as refinancers.

Up to this point, mortgage rates had been surging due to anticipation of improved economic growth. The silver lining to this for home buyers is that while their potential mortgages might be getting more expensive, they may be benefiting from the improving economy in the form of better job security, higher wages, or improved investment performance. However, mortgage rates driven higher by inflation would simply bring higher borrowing costs without those offsetting benefits.

Some effects of inflation can be hard to pick up on at first -- prices of consumer goods do not rise in unison, and people tend to buy most things at irregular intervals. However, if inflation drives mortgage rates higher, you can count the cost directly on a mortgage payment calculator. To anyone hoping to buy a house later this year, or looking for an opportunity to refinance a mortgage, a loan calculator will reflect the cost of inflation in stark, dollars-and-cents terms.