Inflation cooled for a second consecutive month in July, easing one of the pressures that pushed mortgage rates higher this summer without yet giving the housing market a clear path to lower borrowing costs.
The Consumer Price Index increased 0.1% in July after declining 0.4% in June, according to the U.S. Bureau of Labor Statistics. Consumer prices were 3.4% higher than a year earlier, down from a 3.5% annual increase in June and 4.2% in May.
Core inflation, which excludes food and energy, increased 0.2% during July and 2.5% over the preceding 12 months. The annual core rate declined from 2.6% in June and remained near its lowest level since early 2021.
For mortgage professionals, the report offers something short of rate relief: a lower probability that renewed inflation will force borrowing costs sharply higher again.
“Two softer inflation reports in a row should calm concerns that price pressures are reaccelerating,” First American Senior Economist Sam Williamson said. “For home buyers, that reduces the risk of another sharp move higher in mortgage rates and provides a little more certainty around borrowing costs.”
Shelter Inflation Continues To Ease
Shelter costs increased 0.1% in July and accounted for roughly two-thirds of the monthly increase in the all-items index, according to the BLS. Rent and owners’ equivalent rent each increased 0.3%, while lodging away from home declined 2.8%.
Shelter prices were 3.2% higher than a year earlier, down from a 3.3% annual increase in June.
Because the government’s shelter measures reflect rents across a broad stock of existing leases, they typically respond more slowly than asking rents on newly available units. Williamson said the subdued growth in asking rents suggests official shelter inflation still has room to moderate.
That matters for the mortgage market because shelter represents a substantial share of core CPI. Continued easing could help hold down future inflation readings even if some service-sector prices remain sticky.
Medical care increased 0.4% in July, airline fares rose 2.2%, and communication costs increased 0.6%. Those gains were partly offset by lower prescription-drug and lodging prices.
Energy prices declined 1.5% during the month, led by a 2.9% drop in gasoline. Energy remained 14.7% more expensive than a year earlier, however, leaving the inflation outlook vulnerable to renewed oil-market volatility.
The Rate Benefit Is Stability, Not Necessarily A Drop
The Federal Reserve held the federal funds rate at 3.5% to 3.75% in July, with three policymakers voting for a quarter-point increase. As NMP reported following that decision, the unusually divided vote showed that another rate increase remained a meaningful possibility if inflation continued accelerating.
July’s CPI report makes that outcome less likely at the Fed’s Sept. 15-16 meeting. It does not guarantee a rate cut or an immediate decline in mortgage rates.
The Fed does not set mortgage rates directly. Longer-term borrowing costs respond more closely to Treasury yields, inflation expectations, economic growth, and demand for mortgage-backed securities. Bond-market reaction to the CPI report was relatively restrained because the inflation figures were broadly in line with economists’ expectations.
Cooling inflation removes some upside risk from mortgage rates, but it does not create an obvious refinance trigger or justify promising buyers that substantially lower rates are imminent.
The average 30-year fixed mortgage rate was 6.69% as of Aug. 6, according to Freddie Mac, up from 6.43% at the beginning of July and nearly three-quarters of a percentage point above its February low.
“Combined with slower house-price growth, rising incomes and more inventory, that gives the housing market more room to rebalance gradually,” Williamson said.
For originators, the immediate opportunity may therefore come from reduced volatility rather than a dramatic rate decline. Buyers who believe rates are unlikely to jump while they search for a home may be more willing to move forward, even if the monthly payment itself has not improved substantially.
