A rising inflation rate could complicate the mortgage interest rate climate.
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Inflation is on the rise again.
That was the major economic takeaway on Friday morning after the Bureau of Labor Statistics released its delayed reading on inflation for September. Released later than planned due to the ongoing government shutdown, the report showed inflation ticking up to 3% from 2.9% in August. While that was a smaller decrease than economists expected, it still represented a move in the wrong direction for millions of Americans.
Two specific groups that could be directly affected are homebuyers and current owners looking to refinance. Mortgage interest rates, after all, have been on a slow but noticeable decline for much of 2025. And they've continued to decline in recent weeks after temporarily rising from a three-year low in September. But with inflation, Federal Reserve rate policy and mortgage interest rates all interconnected, there's much to consider right now. And not all of it is good news for the mortgage market. Below, we'll break down what the new inflation developments could mean for mortgage rates, specifically and what buyers and owners may want to do in response.
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How the inflation rise could impact mortgage interest rates
So what could this new inflation development ultimately mean for mortgage interest rates? That depends on who you speak with, but it's certainly a bit complicated. To understand the potential ramifications, it helps to take a step back first.
The Federal Reserve's target inflation rate is 2%, so the 3% it's at now is unlikely to encourage additional interest rate cuts, especially if this increase is an indication of additional inflation hikes ahead. The Fed generally feels safer cutting rates as inflation declines, not as it increases. And that's been a big reason why mortgage rates have seen major drops over the past 13 months, alongside multiple Fed rate cuts.
At the same time, the Fed is also trying to balance unemployment concerns, which have also been pronounced in recent months as the rate there has ticked up, too. That's why projections surrounding rate cuts in the Fed's final 2025 meetings in October and December remain high, even though inflation performance in and of itself would otherwise normally imply a "wait and see" approach on behalf of the central bank. This can explain the reason why expected cuts, which sat close to a 100% certainty according to the CME Group's FedWatch tool earlier this week, are now in the low 90% range instead. In other words, they're still likely but less of a sure thing than they were before the latest inflation reading was released.
So, what does this all mean for mortgage interest rates? Fed rate cuts still look likely for the final months of the year, so that's a boost for buyers and homeowners looking to refinance as lenders take much of their direction from the Fed, even if they aren't directly dictated by the bank. Still, it's important to remember that cuts are expected to be in just 25 basis point increments each time. And some lenders may be reluctant to reflect those in their offers, especially with problematic inflation humming along in the background. If the inflation rate continues to rise in October and November (both data points of which the Fed may have before its December meeting, based on how the shutdown evolves), a reduction in the final weeks of 2025 may also be eliminated entirely.
So, there's a lot to consider right now. If you can currently afford today's mortgage rates and are ready to act, it may make sense to do so. With so many evolving economic factors that can impact your borrowing costs, it can behoove you to lock in a mortgage rate now and simply look to refinance after this all shakes out. Waiting for rates to drop lower could be a costly mistake.
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The bottom line
The latest inflation report may or may not have an adverse impact on mortgage rates. It's too soon to tell definitively. But it won't help ease the Fed toward additional rate cuts, and it could complicate the mortgage rate climate more than it already is.
If you want to buy a home or refinance your existing one, then be sure to take a measured and comprehensive approach now. And that means monitoring the mortgage rate market daily for opportunities to both act and, potentially, for signs to delay any action, too.
Edited by Angelica Leicht
