NEW YORK (MainStreet) — Inflation is rearing its ugly head again, with consumer prices up 2.1% in February. Inflation doesn’t just force consumers to dig deeper for more goods and services, it also pumps up mortgage rates. That has implications for new home shoppers.

To understand the dynamic between inflation and mortgage rates, you have to start with the U.S dollar, which tends to slide during inflationary times, and then weight the impact of that trend on the prices of mortgage bonds.

With the dollar down against other key global currencies, investments tied to it like mortgage bonds, which are priced in dollars, decline too. Like most investments, when mortgage bonds go down, investors tend to adopt a herd mentality and sell off their mortgage bond portfolios, which causes prices to decline even further.

The thing is, when mortgage bond prices fall, mortgage bond yields rise (to attract more buyers). But mortgage rates are tied to bond yields, so when those yields rise, so too do mortgage rates.

It’s really Economics 101. Wall Street is a crowded place, and the financial markets literally have hundreds of investments to choose from. When demand falls, as we’re starting to see happen lately with mortgage bonds, owners of those securities have to trigger increased demand to get more investors back into the marketplace. One of the best ways to do that is to hike the interest rates paid on those investments. If inflation holds its present course (and it should – once inflation gets rolling, it’s hard to stop it), then we should see a downward spike in bond prices and an upward spike in bond yields.

Inflation is a real threat to mortgage bond investors (and to all fixed-income investors, for that matter). Take a mortgage bond with a 6% interest rate. Spiking inflation actually cuts into that 6% and reduces its value. So 2% inflation actually reduces a 6% return to 4%, and that’s the stage being set now for bond investors and, by extension, home shoppers.

Consequently, when inflation really sets in it can translate into higher mortgage rates rather quickly. Fortunately for homebuyers, that hasn’t happened yet, at least not on any grand scale.

Right now, the average 30-year fixed mortgage is charging a highly-reasonable 4.916% interest, as measured by the BankingMyWay Weekly Mortgage Rate tracker.

And the 15-year mortgage is offering homeowners even a better deal, rate-wise: It’s at 4.261%, the rate tracker says.

Even adjustable-rate mortgages are exceedingly affordable these days. Here’s a quick look, again using the BankingMyWay mortgage rate barometer, which shows very good rates across the board:

--------------------------------------------------------------------

Category                     Rate

1-year ARM                 4.136%

3-Year ARM                3.541%

5-year ARM                 3.733%

--------------------------------------------------------------------

Nobody can tell you the perfect time to buy a new home, but with inflation already ramping up, low mortgage rates may not be around much longer.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.