Despite a hotter than expected inflation report, mortgage rates ticked down this week. The latest consumer price index report showed a higher than expected increase in headline inflation, due in part to higher energy prices. However, the stickier components of the consumer price index, including rents – which make up the largest share of core inflation – are still moderating. 

The yield on the 10-year Treasury note – which mortgage rates tend to follow – reflects expectations about future inflation and future economic growth. Leading indicators of economic activity showed the services sector is slowing. Last week’s employment data also showed some loosening of the labor market, with wage growth moderating and the unemployment rate inching higher. At the same time, a less tight housing market points to further moderation in price and rent growth. Lastly, a brewing economic slowdown overseas may contribute to increased demand for US Treasury notes.

Expect more rate volatility ahead as the Fed and investors wait for more conclusive evidence of a return to low, stable and predictable inflation. This week’s Producer Price Index data release – the last major inflation marker before next week’s Federal Open Market Committee interest rate decision – will likely cause some repricing activity.