The Commerce Department delivered a blow to the Federal Reserve's stance about inflation as its latest report shows consumer prices rose by 6.2% year-over-year—the largest increase in more than three decades. When you remove the more volatile components like food and energy, the core consumer price index (CPI) increased by 4.1% annually. That's the highest reading for the core CPI since 1991. 

The cost of fuel is likely where Americans are seeing one of the largest increases with prices rising more than 12% monthly and nearly 60% annually. There were also significant increases in used cars, food and rent. 

For months, Fed Chairman Jerome Powell, along with the Federal Open Market Committee Members (FOMC), have been firm in their assessment that the inflation we are seeing right now is "transitory." The Fed is basically saying that what we are seeing is a side effect of supply chain issues and won't be permanent. 

However, the timeline for the duration of this period of inflation continues to stretch out beyond what the Fed's initial prediction was. The FOMC has been holding off on implementing changes in its current monetary policy in order to get a more clear picture of what's happening in the economy. This report might hasten their timeline for action with interest rates. 

Remember the Fed does not control mortgage interest rates. When we talk about the Fed raising rates we are referring to the benchmark overnight lending rate which is what banks pay to borrow money. You would see this change show up in things like your interest on credit card purchases or car loans. However, there is a sort of trickle-down effect when the Fed raises rates because that means it's more expensive for banks to borrow which gets passed on to consumers by other means which can be mortgage interest rates. Banks are typically big buyers of mortgage loans because they get paid off the interest rate you pay. So when the Fed raises rates, mortgage interest rates might also rise in order for the loan originators to be able to meet the higher interest rate demand from banks who buy the loans. 

The Fed already announced it would start to taper its bond purchases by $15 billion total starting this month but this latest information might force them to become more aggressive in that pullback. Part of what the Fed has been buying is mortgage-backed securities (MBS). Those MBS are pools of home loans with similar characteristics that investors can buy and sell on the secondary market much more easily than if the loans were individual. Part of why mortgage interest rates have remained at these historically low levels is because the Fed created consistent demand for mortgage loans through its bond purchasing program. As the Fed pulls back, there will be less demand for MBS with lower interest rates (buyers get paid off of interest rates) and will likely cause interest rates to start to increase to meet investor demand. 

The markets reacted to the Commerce Department's report with the Dow dropping more than 200 points as the rates on bond yields spiked. Mortgage interest rates closely follow the movements of the 10-year Treasury note yield. So when the 10-year note jumped by 10 basis points, that typically means that mortgage interest rates will fluctuate with it and also rise. 

Inflation and housing

The increase in the cost of items overall is not helping homebuyers who are already facing extremely high home prices. The latest S&P CoreLogic Case Shiller National Home Price Index showed that home prices again rose by 19.8% in August. That matches July's reading, however, and as we mentioned in previous updates could indicate that we've hit the peak of home price growth.

Interest rates have been generally trending upward over the last few months, but have generally stayed close to the 3% mark with the latest Freddie Mac 30-year fixed-rate mortgage average coming in at 2.98%. As we like to point out, this average is for conforming loans across a certain number of lenders. This is a good general gauge for trends in where interest rates are moving, but your individual interest rate will be different depending on the kind of loan you apply for, your down payment, your credit history and other factors. That's why it's very important to talk to a Movement Mortgage loan officer to see all your options before assuming this is the rate you will qualify for.