The inflation rate doesn’t directly affect mortgage rates, but the two tend to move in tandem. Rising inflation shrinks purchasing power as prices of goods and services increase. Higher prices can then influence the Federal Reserve’s interest rate policy, affecting the cost of borrowing for lending products like mortgages. Then, as inflation cools, mortgage interest rates often ease as well.
Key Points
• Inflation does not govern mortgage rates but indirectly impacts them through Federal Reserve interest rate policies.
• Historical data shows a correlation between inflation rates and mortgage rates.
• Inflation impacts adjustable-rate mortgages more directly than fixed-rate mortgages.
• Homebuyers and homeowners should consider current economic conditions when making mortgage decisions.
• Inflation is only one factor to take into account when deciding whether or not to purchase a home.
What Is Inflation?
To understand how inflation and mortgage loan rates are connected, it helps to first understand what inflation is in the first place: a general increase in prices and a related drop in the purchasing value of your hard-earned money.
When prices rise but paychecks remain steady, people feel the pinch of inflation. The Federal Reserve, the central bank of the United States, tracks inflation rates and trends using several key metrics, including the Consumer Price Index (CPI), to determine how to direct monetary policy. A target inflation rate of 2% is considered ideal for maintaining a stable economic environment over the long run, and in 2024, many borrowers were relieved to see the inflation rate — which trended upward in 2022 — ebb. By the end of 2024, it had come close to the target goal.
Types of Inflation
Several factors may cause inflation. Supply and demand play a large role in how prices rise.
Supply
In supply-side inflation, also known as cost-push inflation, prices rise due to supply challenges. When the cost of labor or raw materials used to make a product increases, prices often follow. Homeowners saw this during the COVID-19 pandemic when building materials were in short supply and renovation projects became much more expensive. More recently, talk of tariffs on imports from China, Mexico, and Canada has caused economists to warn of inflation.
Demand
Demand-pull inflation happens when there is increased demand for a product or service. Sometimes this is a natural outgrowth of demographic patterns, such as when a large population group moves into a new lifestage. Anyone in the home-buying market can relate to this: When there are lots of homebuyers and limited inventory of properties for purchase, sellers can command higher prices.
Inflation Spiral
An inflation spiral — also known as a wage-price spiral — happens when wages rise in reaction to price increases. Increased wages in turn cause elevated demand for goods and services. It can be hard for economic policymakers to break this back-and-forth pattern.
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How Are Inflation Rates Related to Interest Rates?
Once you understand the basics of inflation, you might wonder: What does all this have to do with interest rates on a home mortgage? As we’ve said, inflation rates don’t have a direct impact on mortgage rates, but there can be indirect effects because of how inflation influences the economy and the Federal Reserve’s monetary policy decisions.
The Federal Reserve does not set mortgage rates. Instead, the central bank sets the federal funds rate target, the interest rate that banks use when they lend money to one another overnight. A Fed increase in this short-term interest rate often pushes up long-term interest rates for U.S. Treasuries.
Fixed-rate mortgages are tied to the yield on those 10-year U.S. Treasury notes, which are government-issued bonds that mature in a decade. When the 10-year Treasury yield increases, the 30-year mortgage rate tends to do the same.
So in terms of what affects fixed-rate mortgage rates, movement in the 10-year Treasury yield is the short answer. Higher yields can mean higher rates, while lower yields can lead to lower rates. But overall, inflation rates, interest rates, and the economic environment can work together to sway mortgage rates at any given time.
Higher rates can make borrowing more expensive while also providing more interest to savers. People borrowing less and saving more can have a cooling effect on the economy. When the economy is slowing down too much, however, the Fed may lower interest rates to encourage borrowing and spending.
If you track the average 30-year fixed-rate mortgage rate and the average annual inflation rate, you’ll see that the percentages often move more or less in concert. Here’s a look at the past 22 years and some key dramatic years before that.
| Year | Average Inflation Rate | Average Mortgage Rate |
|---|---|---|
| 2024 | 2.9 | 6.72 |
| 2023 | 3.4 | 6.81 |
| 2022 | 8 | 4.87 |
| 2021 | 4.7 | 2.96 |
| 2020 | 1.2 | 3.11 |
| 2019 | 1.8 | 3.94 |
| 2018 | 2.4 | 4.54 |
| 2017 | 2.1 | 3.99 |
| 2016 | 1.3 | 3.65 |
| 2015 | 0.1 | 3.85 |
| 2014 | 1.6 | 4.17 |
| 2013 | 1.5 | 3.98 |
| 2012 | 2.1 | 3.66 |
| 2011 | 3.2 | 4.45 |
| 2010 | 1.6 | 4.69 |
| 2009 | -0.4 | 5.04 |
| 2008 | 3.8 | 6.03 |
| 2007 | 2.8 | 6.34 |
| 2006 | 3.2 | 6.41 |
| 2005 | 3.4 | 5.87 |
| 2004 | 2.7 | 5.84 |
| 2003 | 2.3 | 5.83 |
| 2002 | 1.6 | 6.54 |
| 2001 | 2.8 | 6.97 |
| 2000 | 3.4 | 8.05 |
| 1981 | 10.3 | 16.63 |
| 1980 | 13.5 | 13.74 |
| 1979 | 11.3 | 11.20 |
| 1978 | 7.6 | 9.64 |
| 1975 | 9.1 | 9.05 |
| 1974 | 11.0 | 9.19 |
Sources: Consumer Price Index and Freddie Mac
Inflation Trends for 2025
In September 2022, the U.S. inflation rate hit 8.2%, well beyond the Federal Reserve’s 2% target inflation rate. While prices for consumer goods and services were up almost across the board, the most significant increases were in the energy category. Many consumers noticed inflation because of increased food prices: In the year ending August 2022, prices for food at home increased 13.5%, the largest 12-month percentage increase since the year ending March 1979. Prices for food away from home increased 8%.
Rising inflation rates in 2021 and 2022 are thought to have been driven by a combination of increased demand for goods and services, shortages on the supply side, and higher commodity prices due to geopolitical conflicts. The Federal Reserve responded by raising interest rates — 11 times between March 2022 and October 2023. Mortgage interest rates also trended north to 7.00%. But the Fed’s measures appear to have had the desired result, putting the brakes on inflation, although it remained above the target. By early 2024, inflation seemed to be moderating when compared to recent years.
Recommended: Understanding the Different Types of Mortgage Loans
Is Now a Good Time for a Mortgage or Refi?
There’s a link between inflation rates and mortgage rates. But what does all of this mean for homebuyers or homeowners? Although interest rates have remained stubbornly between 6.00% and 7.00% for the last couple years, mortgage rates are still below average when viewed through a historical lens. Moreover, the latest market research predictions in early 2025 indicate that mortgage rates may hover around an average of 6.50% in 2025 and drop only marginally in 2026. So if you are thinking about a refi or home purchase, it pays to take that forecast into account.
If you can get a reasonable mortgage rate, buying now with a fixed-rate mortgage could help you lock in that deal. Going with an adjustable-rate mortgage could allow borrowers to benefit from future rate drops, though if interest rates rise, an adjustable rate would follow.
If you own a home and are considering refinancing your existing mortgage, the math gets a bit trickier. You would be wise to determine your break-even point — when the money you save on interest payments matches what you’ll spend on closing costs for a refinance.
To find the break-even point on a refi, divide the closing costs by the monthly savings. If refinancing fees total $3,000 and you’ll save $250 a month, that’s 3,000 divided by 250, or 12. That means it’ll take 12 months to recoup the cost of refinancing.
If you refinance to a shorter-term mortgage, your savings can multiply beyond the break-even point. A shorter term means you will pay less interest over the life of the loan, although monthly payment amounts will be higher than they would be for a 30-year loan.
Keep in mind that the actual rate you’ll pay for a purchase loan or refinance loan will depend on things like your credit score, income, and debt-to-income ratio.
💡 Quick Tip: Lowering your monthly payments with a mortgage refinance from SoFi can help you find money to pay down other debt, build your rainy-day fund, or put more into your 401(k).
The Takeaway
Inflation abated somewhat by the end of 2024, but 2025 presents some unknowns. Homebuyers can likely expect continued variation in interest rates. It’s true that buying a home or refinancing when mortgage rates are lower could mean substantial savings over the life of your loan. But if you’re ready to buy and your finances are in good shape, it doesn’t make sense to wait for slight changes in interest rates — if you’re ready to own your own home, the time is right for you.
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FAQ
What effect does inflation have on interest rates and why?
If inflation rises, interest rates typically follow. The opposite is also true (when inflation ebbs, interest rates usually fall).
Does inflation affect fixed-rate mortgages?
Inflation will not affect the amount of your monthly payment if you have a fixed-rate mortgage because your interest rate remains steady over the life of your loan. Your overall budget may feel tighter when prices of things like groceries and gas rise, but your actual mortgage payment will stay the same.
Does inflation affect adjustable-rate mortgages?
Inflation may have an impact on your monthly mortgage payment if you have an adjustable-rate mortgage. With this type of mortgage, your interest rate usually adjusts every 6 months or every year (after an initial rate period which might be 5, 7, or 10 years, for example). How much the rate can change will depend on your loan agreement.
Does inflation affect housing prices?
Inflation generally means an upward trend in housing prices, in part due to the rising cost of building or refurbishing a home. But this is not always the case. Sometimes the high overall cost of goods and services leads would-be homebuyers to stay out of the market. Less demand might lead to a drop in home prices. Over decades, however, home prices have increased at a rate greater than the rate of inflation.
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