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A Connection Between Mortgage Interest Rate and Inflation

For more than a decade, the housing market has benefited from low mortgage interest rates. There has been a lot of debate about when these rates will rise. When interest rates rise, it will have an impact on purchasers' purchasing power because each increase in interest rate means less money available to spend on the principle amount of a mortgage (for example, a buyer may be able to afford a $500,000 at 3% but only $470,000 at 3.25%)

So, What are interest rates, and how do they change? To answer that, we must first understand the role of the Federal Reserve. The Federal Reserve, often known as the Fed, is a central bank established in order to provide economic stability. It evaluates risks such as rapid inflation, unemployment, and uses of monetary policy to produce calmness to the citizen. When the economy grows too quickly or too slowly, the Fed can make adjustments.

Since the recession of 2009, the Federal Reserve has pursued an economic stimulus policy (achieve maximum employment and keep inflation at 2%). To do so, it kept the federal fund rate near to zero while also buying Treasury and Mortgage bonds to influence long-term interest rates (such as mortgages).

The Consumer Price Index (CPI) has increased spectacularly in recent months due to a number of reasons, suggesting an inflationary period during which costs are growing too quickly. In fact, prices rose 6.8% over November 2020 in November 2021, the highest rate since 1979. The Fed announced at its December meeting that it would alter its strategy and with that, it is more likely to expect that mortgage interest rates will be going up as a result.

As you can see in the chart, it compares the rate of inflation measured by the change in the Consumer Price Index over a 12-month period (data from Bureau of Labor Statistics) to a 30-year fixed mortgage rates (data from Freddie Mac) during the previous 50 years. There is a connection between the two, as you can see, and the rapid inflation we're experiencing now is mirrored in the graph below. Historically, an inflation rate increase like what we're seeing now would have resulted in the Federal Reserve reducing its activity and mortgage interest rates shooting up dramatically.

However, it's important to remember that the Fed will be cautious now because the economy is still healing from COVID, and new concerns are raising. Furthermore, price hikes are partly due to supply chain and labor issues - not simply demand and supply. In 2022, the COVID-related federal stimulus will cease. These factors will continue to have an impact on the economy. The Fed is anticipated to meet again in March 2022, and while it is expected to walk carefully when it comes to slowing the economic growth, mortgage rates are anticipated to rise.


Data derived from Bureau of Labor Statistics (Consumer Price Index for all Urban Consumers) and Freddie Mac’s Primary Mortgage Market Survey: Conventional, conforming 30-Year Fixed-Rate Mortgage Series.

Bureau of Labor Statistics: (choose more formatting options, change period to 1971-2021 and choose 12-month percent change)


We all know how much more expensive mortgages have become over time, but what do you think about the recent increase in interest rates? As a home buyer or seller, what can you say about this matter? Let us know your thoughts.

If you are ever interested in chatting about buying or selling real estate or becoming a member of our team, contact me at or call me at 425-559-1355.


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