Market NewsMatthew Gardner July 25, 2022

The Landscape for Mortgage Rates and Inflation in 2022

This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market. 



Hello there, I’m Windermere’s Chief Economist Matthew Gardner and welcome to this month’s episode of Monday with Matthew. You know, one of the many things I love about being an economist is that it is a remarkably humbling profession. You see, just when we start to believe that our models are close to perfection, something comes along to remind us that forecasting isn’t an exact science.

And if you’re wondering what I am talking about, I recently took a look at the 2022 mortgage rate forecast I put out at the start of the year and…well, let’s say that rates rose at a far faster pace than I had anticipated. I thought that now would be a good time to take another look at rates and share my thoughts on the direction that they will likely take during the rest of the year and my reasoning behind it. And that means we need to talk about inflation.

30-Year Conventional Mortgage Rates: 2018 – 2022

A graph showing the 30-year conventional mortgage rates for the years 2018-2022. The curve of the graph creates a sine wave, increasing from roughly 4% to 5% in 2018, dropping to roughly 3.5% by the end of 2019, decreasing further to roughly 2.5% by the end of 2020, coming back up to roughly 3.0% by the end of 2021, and spiking up to over 5.8% in 2022 before dipping slightly.


So, a quick look back. As you can see, there wasn’t much to celebrate in 2018, with rates rising from 3.95% to 4.94% before pulling back and ending the year at around 4.5%. In 2019, rates fell following the Feds’ announcement that they were likely done with raising the Fed Funds Rate, and the mortgage market also reacted positively to the announcement from the White House that they were going to impose tariffs on select Chinese imported goods. We saw an uptick in late summer, but that was mainly due to news related to BREXIT.

In 2020, rates were dropping but spiked very briefly when COVID-19 shut the country down and bond markets panicked. But with the Fed jumping in with an emergency rate cut and announcing that they would start buying a significant number of treasuries and mortgage-backed securities, rates tumbled to an all-time low of just 2.66%. In 2021, rates rose as new COVID infections plummeted, but then dropped again as the Delta variant took hold, but ultimately trended modestly higher in the second half of the year.

And then we get to 2022. Rates started the year at just over 3.1% but have since skyrocketed to over 5.8% before a small pullback that started a few weeks ago. In as much as economists expected rates to rise this year, nobody anticipated how fast they would rise. So, what went wrong? Well, there’s actually a rather simple answer.

Even though we expected rates to trend higher in 2022, there were two things we hadn’t built into our forecast models.

  1. Russia’s invasion of the Ukraine
  2. Inflation continued to climb for far longer than we expected

So, how do things look for the rest of the year? To explain my thinking, it’s important to remember that the bond market and, by implication, mortgage rates hate nothing more than high inflation because when inflation is running hot, it limits demand for bonds which, in turn, forces the interest rate payable on bonds to rise and this pushes mortgage rates higher.

But what’s been fascinating to watch is that over the past couple of weeks, rates have actually been dropping which is certainly counterintuitive given where inflation is today. And the only reason I can see for this is that bond traders were thinking that inflation might be topping out.

But then we got the June CPI numbers, and it certainly didn’t suggest that inflation was slowing, in fact it showed the opposite. But even though the total inflation rate hasn’t yet peaked, I believe that a shift has actually started and that we are closer to a peak in inflation than you may think.

Indicators of Inflation: Consumer Spending

Three line graphs titled "Consumer Price Index," "Inflation Adjusted Consumer Spending," and PCE Price Index. The Consumer Price Index shows year-over-year percentage changes from present day back to January 2021, with two lines showing all items and all items less food and energy. The all items line starts around 1.5% in January 2021, gradually increasing to 9.1% in June 2022, while the all items less food and energy line also starts around 1.5% in January 2021 and undulates to 5.9% in June 2022. The "Inflation Adjusted Consumer Spending" chart shows month-over-month percentage changes from January 2021 to May 2022. The line spikes up and down throughout the first half of 2021, going as high as roughly 4.5% around March 2021 and as low as roughly negative 1.5% in February 2021. The line stabilizes for the remainder of the x-axis, ending at 0.4% in May 2022. The "PCE Price Index" graph shows year-over-year percentage changes from January 2021 to May 2022. The line starts around 1.5% in January 2021, gradually increasing through February 2022 around 5% before tapering to 4.7% in May 2022.


The June CPI report showed the headline inflation rate still trending higher but look at the core rate which excludes the volatile food & energy sectors. That has actually been pulling back for the past three months. And consumer spending when adjusted for inflation fell 0.4% in May. That’s the first monthly drop since last December, and I expect the June number when it comes out at the end of the month to show spending dropping even further.

This is a very important dataset that often gets overlooked but it is starting to tell me that the economy is slowing because of inflation and slower spending acts as a headwind to further price increases.

The core PCE price index is up 4.7% year-over-year, but this was the smallest annual increase since last November and you can see that it is also starting to roll over. This index is actually the Fed’s favored measure of inflation as it’s more comprehensive that the CPI number as it measures the change in spending for all consumers, not just urban households.

Indicators of Inflation: 5-Year Breakevens and Producer Price Index

Two line graphs titled "5-Year Inflation Breakevens" and "Producer Price Index." The breakevens graph shows percentage changes from January 2022 to July 2022, starting at 3.0% in January 2022, increasing to 3.59% in March 2022, before gradually decreasing to 2.50% in July 2022. The "Producer Price Index" graph shows year-over-year percentage changes from January 2020 to May 2022, with two lines showing Total PPI and Core PPI. Both lines gradually increase along the x-axis, peaking around March 2022. Total PPI increases from 2.0% from 10.8 in May 2022, while core PPI increases from 1.6% to 8.3% over the same time period.


The five-year “inflation breakeven” has plunged more than a full percentage point since peaking at just under 3.6% in late March. And this number is important as it lets us know where bond traders expect the average inflation rate to be over the next five years.

The Producer Price Index measures inflation at the wholesale, not retail, level and even though the total rate rose as energy costs continue to impact the manufacturing sector, the core rate has been pulling back for the past three months. Now let’s look at some commodity prices and see what’s going on there.

Selected Commodity Prices: Natural Gas, Copper, Soybeans, Wheat

Four line graphs titled "Natural Gas Prices," "Copper Prices," "Soybean Prices," and "Wheat Prices." Natural Gas, Soybean, and Wheat prices all share a similar trend in that they gradually increase from January 2022 to June 2022 before dropping from June to July 2022. Natural gas prices fell by 34% from June to July 2022, while soybean prices fell 10% and wheat prices fell 27% over that same time period. Copper prices are steady from January 2022 to April 2022, before gradually dropping through April and May, then drastically falling 26% from June to July 2022. In summary, prices of all commodities are falling a significant amount over the past month (June to July 2022).


  • The price for natural gas is down over 34% from its recent high
  • Copper prices are down 26% from the recent June peak and down substantially from March
  • Soybean prices are down 10%
  • Despite the war in Ukraine, wheat prices are down 27% from June

Retail Gas Prices: West Coast, West Coast Excluding CA, U.S.

A line graph titled "Retail Gas Prices" with three lines: U.S., West Coast, and West Coast excluding California. All three lines show increases in price per gallon from January 2021 to July 2022. All three lines peak in June 2022. The West Coast gas prices went from roughly three dollars per gallon to $5.68 per gallon in July 2022, the West Coast excluding California line goes from roughly $2.50 per gallon in January 2021 to $5.28 in July 2022, and the U.S. line goes from just below $2.50 per gallon in January 2021 to $4.75 per gallon in July 2022.


It appears as if gas prices have also rolled over. Of course, here on the West Coast it’s more expensive than the nation even when you take California out of the equation.

U.S. Treasury Yields: 10-Year and 2-Year Constant

A line graph with two lines showing the U.S. Treasury Yields 10-year constant and 2-year constant from January 2022 to July 2022. The 10-year constant gradually increases over this period of time from 1.5% in January 2022 to 2.99% in July 2022. The 2-year constant gradually increases as well, from roughly 0.75% in January 2022 to 3.07% in July 2022.


And finally, to cap things off, traders must also be pondering the same numbers as I am because bond yields themselves have been tumbling at both the long and short ends of the yield curve with the 10-year note still yielding less than 3% even after the CPI report and two-year yields, while still elevated, are still down from 2.42% just two weeks ago.

So, given all the charts we have looked at, I hope that you too are seeing some light at the end of the tunnel when it comes to the likelihood that inflation is about to start easing.

No doubt, the headline inflation number for June wasn’t one that anyone wanted to see but, if the trends we have looked at continue, I still expect inflation to start slowly creeping lower, which will push bond prices higher, yields will start to pause—if not drop—and that will allow mortgage rates to hold at or close to their current levels for the time being. Although we could see rates coming down, though they will still start with a five for the foreseeable future. I hope that you have found my thoughts of interest.

About Matthew Gardner

As Chief Economist for Windermere Real Estate, Matthew Gardner is responsible for analyzing and interpreting economic data and its impact on the real estate market on both a local and national level. Matthew has over 30 years of professional experience both in the U.S. and U.K.

In addition to his day-to-day responsibilities, Matthew sits on the Washington State Governors Council of Economic Advisors; chairs the Board of Trustees at the Washington Center for Real Estate Research at the University of Washington; and is an Advisory Board Member at the Runstad Center for Real Estate Studies at the University of Washington where he also lectures in real estate economics.