Mortgage rates spiked abruptly last week after several economic reports showed the economy doing better than expected. Now this week, key inflation data showed prices falling faster than expected. Rates responded with a full recovery.

If rates could only choose one thing to be afraid of, it would be inflation.  Rates are based on bonds.  Bonds offer investors a fixed schedule of cash flow.  Over time, inflation can make that cash buy much less “stuff” than it did at first.  Investors compensate by demanding higher rates of return, and that is essentially the short version of the great post-covid rate spike.

Up until this week, the most closely-watched inflation metric had been consolidating in an increasingly narrow, sideways pattern, but still at elevated levels.  While it’s only one month of data, this is the promising breakout…

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