Higher Oil Prices

Mortgage rates moved higher again this week, reaching their highest levels in more than a year. One of the biggest factors behind the move? Rising oil prices and growing concerns about inflation.

To reduce short-term volatility and get a clearer picture of underlying inflation trends, investors look at core CPI, which excludes food and energy. In August, Core CPI was 2.4% higher than a year ago, down from 2.5% last month and the lowest annual rate since March 2021. Shelter (housing) costs were up 3.0% on an annual basis and continue to be a primary reason why bringing inflation down to the 2% target of the Fed remains challenging. Airline fares and used vehicle prices also posted significant increases this month. Investors now are pricing in a roughly 90% chance that the Fed will raise the federal funds rate at its meeting next week. 

On Thursday, the European Central Bank (ECB) raised its benchmark interest rate by the anticipated 25 basis points to 2.50%. Policymakers cited rising energy costs and their potential impact on food, goods, and services prices. The ECB also acknowledged increased uncertainty stemming from ongoing geopolitical tensions in the Middle East and in Ukraine, which could create additional inflation pressures while weighing on economic growth. Investors currently expect further rate increases from the ECB in the coming months.

Bottom Line: There's a lot for investors to weigh right now: slower economic growth, inflation that remains elevated, and continued uncertainty around the world. For mortgage rates, that means we could see more volatility in the weeks ahead. Rates will continue to react to incoming economic data, Federal Reserve comments, and major developments around the world.

Looking ahead, attention will remain fixed on the conflict in the Middle East and oil prices. The next Fed meeting will take place on Wednesday, and the majority of investors anticipate an increase in the federal funds rate. For economic reports, Retail Sales will be released on Wednesday. Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key measure of the health of the economy. Housing Starts will come out on Thursday.