A row of condos against a backdrop of large bills.
Illustration by Lanette Behiry/Real Estate News; Shutterstock

What do today’s inflation numbers mean for mortgage rates? 

Some called the latest report “disappointing,” but economists still expect a downward trend in the months ahead.

September 13, 2023
3 minutes

Key points:

  • Inflation rose for the second consecutive month, settling on an annual rate of 3.7% in August.
  • The Federal Reserve will consider the inflation data when it meets next week to decide if another rate hike is necessary.
  • Most analysts don’t expect the Fed to raise interest rates in September, but an end-of-year hike is still possible.

With the latest economic data showing an uptick in the overall inflation rate, that means another interest rate hike is coming, right?

Well… maybe not.

The consumer price index (CPI) data showed that annual headline inflation, which includes food and energy prices, rose to 3.7% in August, marking the second month in a row of increases. That's not what the Federal Reserve, which has a goal of getting inflation down to 2%, wants to see.

From July to August, headline inflation was up 0.6%, the biggest month-to-month jump so far this year.

While headline inflation is trending in the wrong direction, there are signs that inflation will continue to slow down — even without more rate hikes. It just may take some time for the data to reflect that slowing.

"This [CPI] report is disappointing, but it's important to remember that the path to the Fed's target was never going to be a smooth one," said Chen Zhao, who leads the economics team at Redfin, in response to the latest inflation numbers. "Overall, the inflation rate is coming down on a bumpy and jagged path, just like we'd expect it to."

So what's going on? The current uptick is mostly being driven by rising gas prices, part of the volatile energy segment of the economy. Core inflation (excluding food and energy) has also risen by 0.3% between July and August, which is slower than headline inflation but still a little hot for an economy that's supposed to be slowing down.

The rise in core inflation is partly due to rent prices, but the CPI is a lagging indicator — which means that the recent slowdown in rent growth won't be reflected in the CPI data until months later, said Lisa Sturtevant, chief economist at Bright MLS. And rents can be a useful signal for what's to come.

"Lower rents appear to be a good sign that inflation will ultimately continue to move lower," Sturtevant said.

What does this mean for mortgage interest rates?

The Federal Reserve will take this latest data into consideration next week as it decides whether to raise interest rates again. While the Fed doesn't set mortgage rates, an increase in the federal funds rate would likely keep mortgages in the 7% range.

Zhao, along with many other economists, does not expect the Fed to raise interest rates during its September meeting, but a year-end hike is still a possibility.

She noted that the Fed doesn't typically make decisions that surprise the markets, and as the meeting approaches, it has shown no signs of countering the consensus that it will pause hikes for now.

"Also, the Fed Funds rate is well within the range where it's dragging down the economy, which means that monetary policy is working even without another hike," Zhao said.

The mood of economists seems to be that further hikes — before seeing the full impact of the current rate — could be unnecessary or even harmful, particularly if the hope is for a so-called soft landing.

"Overdoing the rate hikes, considering that inflation is likely to calm, will unnecessarily damage the economy," said Lawrence Yun, chief economist at the National Association of Realtors.

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