Which way mortgage rates?

Will the tame inflation number out today help to turn around the recent rise in mortgage rates? The last thing this economy needs is a slowdown in mortgage refinancings and home buying.

The U.S. Labor Department said today the consumer price index increased just 0.1 percent in May after it was unchanged in April. Inflation and inflationary expectations appear to be under control.

Meanwhile, Reuters is reporting that U.S. mortgage applications fell for a fourth consecutive week, with overall demand plunging to its lowest level in nearly seven months.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended June 12 decreased 15.8 percent, the lowest since the week ended November 21, 2008, Reuters said.

A rise in mortgage rates in recent weeks had sapped demand, particularly for home loan refinancing. But the direction of rates reversed course last week.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.50 percent, down 0.07 percentage point from the previous week, Reuters said. But that is significantly higher than the low of 4.61 percent set in the week ended March 27.

Now comes the question: Will the decline in mortgage rates pick up steam, given low inflation? Or will all the deficit financing by the federal government work against lower long-term rates?

Nothing less than the strength of the housing market depends on the answer.