Troubling Sign for Mortgage Rates as Inflation Surges to 3-Year High of 3.8%

Inflation continued on its upward trajectory in April, fueled by a Middle East energy price shock, reaching its highest level in three years and spelling potential trouble for the spring homebuying season.

Overall prices increased by 3.8% in the 12 months through April, up from 3.3% in March, according to the U.S. Labor Department's Consumer Price Index (CPI) data released Tuesday. The April reading was in line with economist expectations but marked the highest inflation since May 2023. 

"Even though today’s hot print was expected due to the ongoing oil price shock, it is troubling nonetheless," says Realtor.com® senior economist Jake Krimmel.

Rising inflation will put upward pressure on mortgage rates, as lenders adjust their rates to ensure their returns outpace the falling purchasing power of the dollar. Mortgage rates averaged 6.37% last week, well up from 5.98% in late February before the Iran war began, according to Freddie Mac.

Core inflation, which exempts volatile food and energy costs, increased to 2.8%, up from 2.6% in March and highest than forecasted.

On a monthly basis, headline inflation measuring overall price changes jumped 0.6%, while core inflation rose 0.4% from the month before.

The energy index increased 3.8% in April from a month earlier, accounting for over 40% of the total monthly cost increases across all items.

Gasoline of all types saw a 28.4% increase in the 12 months ending in April and 5.4% from March, while fuel oil surged a staggering 54.3% on an annual basis.

On Tuesday, a gallon of regular gasoline in the U.S. cost on average over $4.5 at the pump, up from $4.15 a month earlier, according to AAA. 

The price of groceries, which arrive in to stores on trucks, rose 2.9% since last year, with the index for beef climbing 2.7%.

Meanwhile, housing costs increased 3.3%, including 0.6% on the month, as transportation and medical services edged up 4.3% and 3.2%, respectively.

Krimmel points out that airline fares rose 2.8% on the month, and apparel and household furnishings both increased, pointing to early signs that the energy shock is bleeding through into core prices via fuel costs and Strait of Hormuz-related supply chain disruptions.

What does it mean for homebuyers?

Krimmel warns that successive hot inflation prints will push up 10-year Treasury yields and mortgage rates, squeezing affordability and further threatening consumer sentiment at a time when buyers and sellers need the confidence to act.

"This is only the second post-oil shock datapoint, but the directional signal is worrying," he says. "What started as an energy story is beginning to turn into something broader, something that we've been calling inflation contagion."

According to the economist, higher inflation prints, whether driven by volatile energy shocks or something more sustaining, are bound to impact the spring and summer housing market too.

Beyond higher mortgage rates, Krimmel says today's real earnings decline represents a double-blow to housing affordability, which had been headed in the right direction earlier in the year.

"Consumers who feel squeezed at the gas pump and uncertain about the future of the economy tend to pull back from making housing decisions with confidence," he adds. "So far none of the warning signs are flashing red, but the data to watch are new listings, mortgage purchase applications, pending sales, and cancellations. If inflation contagion takes hold, those are the places it will show up first."