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Mortgage rates are set to rise at the fastest pace in decades in 2022 and if there’s only one thing to blame, it’ll be inflation. There are many ways to link inflation to upward pressure on rates, but the simplest is to consider that rates are based on bonds and that inflation reduces the value of bonds.
In other words, if you’re an investor who buys mortgages, you might be willing to accept a 6.5% rate of return today. Now suppose that inflation skyrockets. If you still charge 6.5%, the payments you receive will buy very little “stuff”. So to get the same financial benefit you will have to increase your rates.
Because of the inflation focus, the biggest inflation reports have been closely watched indicators for rate movements for over a year now. None is bigger than the Consumer Price Index (CPI), and the latest installment comes out on Wednesday morning, May 10 at 8:30 a.m. Eastern Time.
There is always a list of several professional forecasts for major economic reports. Markets adjust to those forecast levels, or close to them, well before the official release of the data. Then if the data lives up to the forecast, the markets need not move much. But if the CPI falls much higher or lower than forecast, the market will see this as a sign that inflation was on a higher or lower trend relative to previous expectations. Rates will respond accordingly (i.e. higher for high inflation and lower for low inflation). The farther the actual number falls from the forecast, the larger the response can be.
For today, there was little additional upward momentum for interest rates, with the average lender rising less than one-eighth of a percent for a conventional 30-year fixed loan. This level of volatility isn’t really worth writing home about considering how big Wednesday could be.
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