What is inflation?

Inflation is defined as, “a general increase in prices and fall in the purchasing value of money” by Oxford Dictionaries.

To illustrate: Inflation in the US spiked at 13.55% in 1980. So in 1980, your dollars would have bought you 13.55% less at a store than they would have in 1979. To look at it another way, it would have cost you 13.55% more to buy the same things — $113.55 instead of $100.

That’s what it means for the same amount of money to have a reduced purchasing power.

Since 1980, inflation has steadily fallen. Its highest point since then was 5.4% in 1990. Since 2011, it’s jogged along at a rate of roughly 2% or below.

As a result, many of us have forgotten to be concerned about inflation. But investors haven’t. And neither has our central bank, the Federal Reserve.

How does inflation affect mortgage rates?

Do mortgage rates always increase with inflation?

For the most part, yes. You typically get higher mortgage rates during periods of high inflation and lower ones with low inflation.

However, responsible economists rarely use the terms ‘always’ or ‘never.’ And that’s because nothing’s ever certain in the world of economic forecasting.

During the period of post-pandemic recovery, things are especially unpredictable.

Mortgage rates haven’t always reacted to economic news as expected. And investors and economists are split on whether we’ll see runaway inflation or — as the Fed believes — price pressures will be only temporary.

COVID, inflation fears, and mortgage rates

Why is COVID-19 driving inflation?

The COVID-19 pandemic has been a major driver of recent inflation.

First, coronavirus created a need for massive government spending on fighting the pandemic and providing relief to Americans who’d suffered economically.

But COVID also created other problems as the medical emergency receded.

For example, supply chains were disrupted as our domestic economy — as well as foreign economies — struggled to reboot. So car plants were left idle owing to a shortage of processing chips. And prices of metals, lumber, and other raw materials shot up, purely because demand outstripped supply.

Almost as importantly, US employers struggled to restaff having previously laid off workers.

Together, these pandemic-related drivers have undoubtedly pushed up the inflation rate.

What to expect in the coming months

At the time this was written, the rate of inflation was running just a little warm. But markets were still obsessed with inflation.

Will mortgage rates keep rising in 2021?

Nobody can ever be certain about the future direction of mortgage rates. But, if inflation does take hold, it’s beyond highly likely that mortgage interest rates will keep rising.

They may well climb higher even if the Fed is right about inflation cooling off within a few months.

That’s because economic growth typically brings higher mortgage rates. And nearly all economists believe a boom is imminent.

Could mortgage rates fall in 2021?

Rising rates seem likely, but aren’t guaranteed. Why? Because there are plenty of threats to the U.S. economy that could arrest increases and perhaps even send rates lower.

For example, suppose some future variant of SARS-CoV-2 (the virus that causes COVID-19) emerges that turns out to be resistant to vaccines.

If that were also highly transmissible, it could set back all the progress and recovery we’ve made since March 2020 — at least until new vaccines are developed.

Or imagine if enough investors suddenly decided that the stock market is an overinflated bubble and pop it. That, too, would be an enormous setback for the economy that’s entirely independent of the pandemic.

Now, you may think those threats are way less likely than either more inflation or a boom. And this writer would agree with you. But neither the two threats above nor others are unthinkable. It’s possible they could happen.

And that’s why future mortgage rates can never be predicted with absolute certainty.

How does all this affect you?

Learning about inflation and mortgage rates can help you understand what’s happening in the bigger economic picture.

But what does it all means for you? How does inflation affect your own home loan and your current or future mortgage payments?

If you’re refinancing, when should you lock a rate?

Choosing when to lock your mortgage rate is always a gamble. You weigh the odds of different scenarios arising and of the different risks and rewards they present.

For example, it usually makes sense to lock your mortgage if you think rates are likely rise. And if you believe rates will full substantially? You might wait.

But there’s never a “right” answer. Because, as we said, there’s never any guarantee about how rates will move from one day to the next.

The Mortgage Reports provides advice — updated every business day and on Saturdays — on what we think may be the smartest move: to lock your rate or to continue to float it.