Inflation Jumps to 3.7% in Troubling Sign for Mortgage Rates

Inflation rose last month, driven by surging gas prices as the war with Iran continues to affect oil prices, according to the latest consumer price index report.

Overall prices rose 3.7% for the 12 months through September, up from a 3.4% annual increase in August, according to data released by the U.S. Bureau of Labor Statistics on Wednesday. CPI measures the average costs consumers pay for a range of goods, including food, energy, commodities, and services.

On a monthly basis, overall prices rose 0.6%, driven by a 9.1% surge in gasoline prices. That's up from a 0.4% monthly increase in August. It will put upward pressure on mortgage rates and add pressure on the Federal Reserve to further increase the benchmark interest rate.

Energy prices have risen sharply, with gasoline up 34.2% year over year. Electricity, natural gas, and other energy expenses have grown as well. Shelter costs also continued to rise, with that category up 3.2% from a year ago.

Prices for a broad range of other kinds of goods, used cars and trucks, education, airline fares, medical care, and apparel among them, also rose.

Freddie Mac mortgage rates went from 6.66% in late August to 7.4% now, and even a surprise bump in existing-home sales in late summer won't counteract continued pessimism while Americans grapple with affordability issues, as well as a housing market seemingly rising out of sight for many young people.

The Federal Reserve raised its benchmark interest rate from 3.75% to 4.00% at its September meeting, based in part on inflation reads. The Fed's strategy has huge implications for the housing market, so it will be closely watching CPI.

Realtor.com® senior economist Jake Krimmel says the consensus, including from FactSet and the Cleveland Fed’s nowcast, was for headline inflation to rise 3.6% year over year, and 0.5% month over month. But this is the last read on inflation before the Fed's next vote on rates on Oct. 28.

That said, the read "probably has little marginal bearing on a housing market that has already slowed significantly," Krimmel explains.

"At a minimum, the Fed will want confirmation that inflation is not getting worse, but that alone won’t mean they see it as acceptable," Krimmel adds.

Rough waters ahead

Josh Hirt, senior U.S. economist for Vanguard, says continued growth shows some resilience in the economy. That's because business investment has remained strong, payrolls rose in September, and the labor market, while not accelerating, is still resilient.

Vanguard expects core inflation to be 3% year over year in the last three months of the year. Vanguard thinks the Fed will hold rates steady in October but could increase them 25 basis points in December.

“Recent upward revisions to income data depict a healthier backdrop for consumer spending and underscore an economy that is accelerating as we move into year-end," Hirt says.

However, Krimmel adds, the surge in mortgage rates is going to hurt the housing market. The 74-basis-point rise in mortgage rates in the past few weeks equates to a 7.2% loss in purchasing power.

For a budget of $2,000 for monthly principal and interest, that means buying power just went down by $22,000.

Combined with the market slowdown that accompanies the fall, the market is up for some cold months, Krimmel says. Already, 20.8% of listings saw price cuts for a September.

"Getting inflation under control remains paramount for the housing market over the next few months," Krimmel says. If that happens by early 2027, we could see lower mortgage rates. It could also mean real wage gains—which today sit at 3%, well below the expected 3.6% inflation rate.

"Reversing these trends will improve purchasing power, help ease the lock-in effect, and get both affordability and market activity moving back toward normal," Krimmel says.