The U.S. stock market ran wild and yields climbed last week because investors worried about an uptick in inflation. Data released this week suggests those fears might have been justified.

The Labor Department said Wednesday that consumer prices rose more than expected in January, raising concerns that inflation may rise too quickly. The Consumer Price Index, which measures the change in the average price of goods and services consumers purchase, jumped 0.5 percent last month, exceeding expectations of a 0.3 percent increase.

The upswing came from a rise in the price of gasoline, shelter, apparel, medical care and food. That's concerning considering fears of inflation caused the stock market to go into a tailspin last week and lifted bond yields higher, which also elevates mortgage rates. An aggressive rise in inflation would cause borrowing costs to rise and eat away at corporate profits.

"Overall, we think the increase in core CPI inflation in January is a sign of things to come over the rest of the year," Michael Pearce, senior U.S. economist at Capital Economics, told Bloomberg News.

Yields on the benchmark 10 Year Treasury Note edged up to a four-year high on Thursday, briefly touching 2.94 percent as further signs of inflation pressures prompted sustained selling of bonds. The 10 Year Treasury note has blown through several technical levels since the beginning of the year. The next stop is 3 percent.(See Chart Below) However, sentiment on stock markets remained calm, with no sign of a return to the turmoil that the march higher in bond yields caused last week, when the sudden return of volatility tore indices down from record highs.

All eyes on the Fed

Economists suspect the Federal Reserve will have to play catch up with inflation and hike interest rates at a quicker pace. The Fed is expected to raise interest rates three times this year. After the CPI data release, markets increased the probability of a rate hike next month, and talks began of a possible fourth rate hike this year.

When the Fed raises interest rates, it tightens spending and makes it more costly to borrow money, which helps prevent the economy from overheating. Now that inflation seems to be accelerating, some are wondering if it will hit — and perhaps surpass — the Fed's 2 percent target.

Should we worried about out-of-control inflation?

Not just yet. Inflation is just beginning to build after staying sluggish for about five years. The market has been longing to see inflation rise and now it's finally happening.

But we can't ignore this: inflation that rises too quickly does cause widespread panic. A CNBC story this week claimed that increasing inflation coupled with falling consumer demand prompts concern about stagflation, an economic phenomenon that originated in the 1970s when the U.S. was beset with rising inflation and high unemployment but stagnant consumer demand.

What would lead economists to consider stagflation as a possibility now? Retail sales.

Retail sales fell 0.3 percent last month, their biggest drop in nearly a year. The decline was unexpected as economists expected sales to go up 0.2 percent in January, keeping on trend with rising retail sales over the past several months. The reversal of fortune shows that Americans' demand for goods dwindled.

At the same time, the rising costs of oil and gas pushed the cost of wholesale goods and services last month, according to the Producer Price Index. The PPI measures the average change in prices businesses charge for their goods and services. Its latest report is further evidence that inflation is on the rise.

What should mortgage bankers do?

Keep watching, and pay close attention to key inflationary metrics. They're the best gauge for how the Fed will act in the coming weeks. Researchers with Goldman Sachs put the chance of a rate hike in March at 95 percent.

New Chairman Jerome Powell will face a unique set of circumstances during his first policy-setting meeting in March. The central bank will have to decide how it'll manage expectations that stronger inflation will require monetary tightening. And policymakers will have to do this while continuing the process of unwinding the Fed's exorbitant $4.5 trillion balance sheet.

There's no doubt the way investors reacted to growing inflation last week, and their impact on the stock market and bond yields, will have a bearing on the Fed's decision making. But, as Eric Stein, portfolio manager at Eaton Vance told Reuters, "…part of the reason the Fed (has raised rates) even with inflation below target is that they expected inflation to pick up, and now it is picking up."

He goes on: "I think the bar for them not to hike (rates) due to stock market volatility is pretty high."

In other mortgage news…

• Redfin released a survey this week showing that just 6 percent of homebuyers would stop their home search if mortgage rates exceed 5 percent. Twenty-seven percent of survey respondents said a 5 percent mortgage rate would slow — but not deter — their plans to buy, while 5 percent said it would increase their urgency to buy. Rates continue to hover at 4 percent, although they're projected to increase this year and potentially reach 5 percent next year.
• Home prices hit all-time highs in nearly two-thirds of U.S. cities in the fourth quarter, according to the National Association of Realtors. Prices for single-family homes reached a peak in 64 percent of metro areas. Of the 177 regions surveyed, 15 percent had double-digit growth.
• Builder confidence stayed put at a level of 72 in February, remaining unchanged from January, according to the National Association of Home Builders and Wells Fargo Housing Market Index. NAHB Chairman Randy Noel is quoted in HousingWire saying that builders are excited about the country's pro-business political climate, which is poised to strengthen the housing market and the overall economy.
• Mortgage applications fell 4.1 percent from last week while mortgage rates surged to their highest level since 2014.
• New home construction increased to more than a one-year high last month, thanks to a rebound in single-family housing starts, which jumped 9.7 percent. Building permits soared to their highest level since October 2016.