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A sharp jump in mortgage interest rates over the past few weeks is taking its toll on mortgage demand. Total application volume fell nearly 7% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. 

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($548,250 or less) increased to 3.14% from 3.10%, with points rising to 0.35 from 0.34 (including the origination fee) for loans with a 20% down payment. That is the highest level since July. 

Refinance demand, which is especially sensitive to weekly interest rate movements, fell to the lowest level in three months, down 10% last week compared with the previous week. Volume was 16% lower than the same week one year ago. 

“Higher rates are reducing borrowers’ incentive to refinance, as declines were seen across all loan types,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting. 

Mortgage applications to purchase a home declined 2% for the week and were 13% lower than the same week one year ago. It was driven by a drop in conventional loan applications. Government loans, which are mostly used by lower-income borrowers, saw a 1% increase in demand. 

“But that was still not enough to bring down the average loan balance of $410,000. With home-price appreciation and sales prices remaining very elevated, applications for higher balance, conventional loans still dominate the mix of activity,” added Kan. 

Rates fell back a little bit to start this week, but then moved higher again Tuesday. The bond market, which dictates daily rate movement, reacted to economic data.

“After an important report on the services sector came out stronger than expected, bonds continued to deteriorate,” said Matthew Graham, chief operating officer at Mortgage News Daily. “When bonds lose enough ground in the middle of a trading day, mortgage lenders occasionally make mid-day adjustments to their rate offerings.”

The current spate of inflation won’t last and ultimately will fall below the Federal Reserve’s target, Chicago Fed President Charles Evans said Tuesday.

While inflation by some measures is running at a 30-year high, Evans told CNBC the supply chain bottlenecks and other issues will subside and price pressures will fade.

“I’m comfortable in thinking that these are elevated prices, that they will be coming down as supply bottlenecks are addressed,” he told CNBC’s Steve Liesman during a “Squawk Box” interview. “I think it could be longer than we were expecting, absolutely, there’s no doubt about it. But I think the continuing increase in these prices is unlikely.”

Inflation has been at 3.6% year over year in the past couple of months, the highest since the early 1990s, according to the Fed’s preferred gauge. Other measures, such as the consumer price index, have inflation running even hotter.

Evans acknowledged that the trend is putting pressure on the economy.

“That definitely is a challenge for households and businesses. I mean, it cuts into income, wages. So that’s a problem. We’re definitely monitoring that,” he said. “It’s really not a monetary policy issue, it’s an infrastructure supply issue at the moment. So I think inflation will be coming down, and I think once it’s come down, we’re still going to be in a low interest rate … world.”

Nevertheless, the Fed broadly has indicated that it has met the inflation part of its mandate, with the level running well above the 2% goal. Consequently, the central bank is expected to begin slowly pulling back on the unprecedented support it has provided during the pandemic, starting with a tapering of monthly asset purchases.

However, interest rate increases are not expected to being until at least the end of 2022, according to current Federal Open Market Committee projections. Market pricing sees the first hike coming either in November or December of next year, according to the CME’s FedWatch tool.

While Evans said he is on board with the tapering, he said the Fed soon will be facing the familiar change of keeping inflation elevated to healthy levels, and likely will have to keep rates low.

“It’s just putting challenges on getting monetary policy to produce sustainable inflation at and above 2% so that we can average 2% over time,” he said.