Investors' outlook for inflation worsened during the week, and mortgage rates moved higher. While the economy remains relatively weak and the recent inflation data has held steady, many signs point to higher levels of inflation down the road. The Fed's Fisher summarized it well, saying that inflation expectations continue to worsen "even in the face of an anemic (economy)." Higher energy prices are behind the inflation fears. Dow Chemical announced this week that it will boost the price of its products by as much as 20% due to its higher energy costs. Until now, manufacturers have mostly absorbed higher production costs, rather than raising the price of their goods. The action by Dow Chemical and several other major suppliers may be an indication that companies are beginning to aggressively pass along their rising costs.

Adding to the concerns of investors, Fed officials have been consistently warning about the risks of higher inflation, and the next move from the Fed is expected to be a rate hike later in the year. The most recent inflation data showed that the overall April PCE price index, the Fed's preferred inflation indicator, rose at a 3.2% annual rate. The Core PCE price index, which excludes the food and energy components, increased at a significantly lower 2.1% annual rate, although this level still would have to decline below 2.0% to fall within the Fed's "comfort zone." Investors fear that the opposite outcome is more likely, however, and that future readings will be higher.