Inflation Eases to 3.4% in Positive Sign for Mortgage Rates

Inflation slowed a bit in July, a hopeful sign that could help temper the steady upward slide of mortgage rates.

The Consumer Price Index Report released Wednesday showed headline inflation rose just 0.1% in July and cooled to 3.4% annually, while core inflation rose 0.2% monthly after a flat June and eased to 2.5% on the year.

That's a good sign for mortgage rates, which have been on a steady upward march from 6.43% July 2 to 6.69% August 6, a 13-month high, according to Freddie Mac.

"None of this is likely to move an increasingly divided FOMC and prediction markets concur," Realtor.com Senior Economist Jake Krimmel said. "The odds of a hold at the September meeting ticked up just two percentage points."

So what does the market need to break the rise in inflation? Lower prices for gas and core goods. Gas prices have wobbled a bit but have a strong hold on consumer sentiment. Core goods rose 0.2% in July after falling for two months. That's the best showing of the year. But it also doesn't yet reflect the new tariffs coming online.

But, Krimmel said, the housing market has avoided another "cruel summer"—the National Association of Realtors found Tuesday that existing home sales activity, seasonally adjusted, is still up about 2% so far this year compared to last.

"Sellers have read the market signals better this year and adjusted pricing accordingly, which has kept sales activity up year over year even as that momentum faded in July."

Progress

Analysts have closely tracked inflation this year because it's become so closely intertwined with the housing market. And it's been a difficult few years amid elevated rates. At least one analyst expects high mortgage rates to persist for at least the next 12 months.

"Most importantly, today’s report is far from the last word on inflation for the Fed," Krimmel said, noting both the July PCE prints and the August CPI and jobs report both precede the next meeting of the Federal Open Market Committee on September 16. Fed Chair Kevin Warsh has advocated for lower rates, but FOMC, which sets U.S. monetary policy, remained divided about what to do in its latest meeting.

"PCE carries more weight with the committee and looks worse than CPI right now, too," Krimmel said. "Chair Warsh has been notably quiet on his outlook, so watch for other governors and voters to fill that communication vacuum in the weeks ahead."

Fan-Yu Kuo, economist at The National Association of Homebuilders was optimistic that energy prices moderating was a good sign. But renewed tensions with Iran remain an open question, since those were such a significant driver of inflationary pressures.

Josh Hirt, an economist with financial advisor The Vanguard Group, was also cautiously optimistic.

"This CPI report is reassuring because it confirms that some of the inflation pressures we saw earlier this year have begun to ease," Hirt said. "At the same time, we're not yet at a point where inflation is clearly returning to the Fed's target. We are seeing progress in the right direction, but we are not yet at the point where the underlying trend is returning to the Fed's target sufficiently."