What the inflation rise means for mortgage rates

For homebuyers, 2023 was not ideal. Stubborn inflation and a spike in the benchmark interest rate range resulted in mortgage rates hitting their highest point since 2000. But as inflation cooled in the second half of the year interest rates were paused — and mortgage rates started to fall again. This led to a cautiously optimistic approach to 2024, with the possibility of rate cuts to come later in the year.

While those cuts could still come, they may be later than anticipated after a Thursday report showed inflation rising in December. It currently sits at 3.4%, up from 3.1% in November, and still above the Federal Reserve's target 2% goal. So what does all this mean for mortgage rates and what should buyers do now? That's what we will break down below.

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What the inflation rise means for mortgage rates

In short: A rise in inflation won't be positive for homebuyers. But it may not necessarily be detrimental, either. Time will tell how it affects rates but, in general, when inflation ticks up, interest rates meant to rein it in can soon follow the same upward trend. So if inflation isn't quite under control, as the new report demonstrates, rate cuts become less likely and additional rate hikes become more realistic. 

"These readings support the Fed's view that the policy stance should remain restrictive for some time," Rubeela Farooqi, chief economist at High Frequency Economics, wrote in a report obtained by CBS News. "They also push back against pricing of imminent rate cuts."

That said, the next Federal Reserve meeting isn't until January 30, so there's some (but not much) time before the Fed could officially raise rates again. But if that looks possible, banks could slowly start to raise their rates in advance (just as they've lowered them in recent weeks following a series of interest rate pauses). This means that, for some homebuyers, now may be their best chance to act.

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Why homebuyers should act now

While today's interest rates pale in comparison to those from 2020 and 2021, they're still relatively low compared to how high they have been historically. And with another interest rate hike possible yet again, there are some compelling reasons why buyers should act now. Here are three to keep in mind:

• Rates may rise again: If Thursday's report was an indicator of a broader fight against inflation — and not just a temporary uptick — interest rates could rise yet again. That means higher rates for homebuyers. And today's 7% average rate becomes much more attractive compared to a 7.5% or 8% rate that could become the norm in the spring and summer.
• There's less competition: Higher rates have led to more homeowners staying put and, thus, less available inventory. But this also means less competition for buyers, depending on your local market. If rates come down, it could draw out more buyers and, potentially, an increase in bidding wars. That's less of a concern if you act now. 
• You can always refinance: Don't get too tied up by today's mortgage rates and be especially careful not to let them discourage you from pursuing your dream home. Interest rates are cyclical and will eventually come down again, although no one knows when or by how much. When that does happen, however, you can refinance to the new, lower rate. 

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The bottom line

A rise in inflation isn't ideal. While it's too early to tell if the December report was an outlier or a sign of greater economic pain to come, it wasn't the news economists were hoping for. An uptick in inflation could result in more interest rate hikes to come and, thus, a greater increase in mortgage rates. Against this backdrop, homebuyers may want to lock in today's rates now and benefit from potentially less competition. Plus, they could always refinance to a lower rate in the future when the market ultimately does stabilize.