Mortgage rates increased for the third straight week, eroding much of the progress made on the housing affordability front over the past few months. Although inflation is cooling, it’s happening at a slower pace than expected. New data from S&P Global shows an increase in business activity, especially in the services sector. The manufacturing sector – which had been contracting rapidly – reported a slower decrease in demand. While new orders across the private sector continued to contract, the rate of decline eased.

The sluggish cooling of demand adds to worries that inflation may not be decelerating fast enough to prevent a more aggressive policy stance at the Federal Reserve. If inflation surprises to the upside and the Federal Reserve adopts a more aggressive policy stance to combat inflation, long term interest rates – including mortgage rates – would also typically adjust upward.

This week, a higher than expected print from the Fed’s preferred inflation gauge – the PCE Price index – could cause more policy uncertainty and higher mortgage rate volatility. Zillow data shows new home listings in January at record low levels for this time of year. Further mortgage rate increases are likely to hinder both supply and demand for housing.