Consumer prices rose modestly in July, matching economists’ expectations and providing additional evidence that the inflation pressures created by the Iran war and surge in energy prices are beginning to ease.
- According to the latest Consumer Price Index, prices increased 0.1% in July, rebounding from the surprising 0.4% decline in June but still posting the second-smallest monthly increase of the past 15 months.
- Annual inflation slowed to 3.4%, down from 3.5% in June and the lowest level in four months.
Energy continues to improve: Energy prices fell 1.5% in July, marking their second consecutive monthly decline. While that was smaller than June’s 5.7% plunge, it tied January for the second-best month this year.
- Gasoline prices fell 2.9% during the month, although they remain 24.6% higher than a year ago.
Food inflation was also relatively tame, with prices rising just 0.1%. That followed a 0.4% decline in June and marked the second-best monthly reading of the year.
Core inflation remains contained: Excluding food and energy, prices increased 0.2% in July after being unchanged in June. While slightly higher, a 0.2% monthly increase has now occurred five times in the past eight months.
- Annual core inflation slowed to 2.5% from 2.6%, reaching its lowest level in five months.
Housing: Shelter costs also offered encouraging news, rising just 0.1% for a second consecutive month. Annual shelter inflation slowed to 3.2%, down from 3.3% and the lowest level since March.
Impact on mortgage rates: The bond market was already weaker heading into the report and saw little movement following the release, suggesting the numbers were largely priced in.
- The bigger change came in expectations for the Federal Reserve. The CME FedWatch Tool now puts the probability of the Fed holding rates steady at roughly 56%, an almost complete reversal from market expectations just one week ago.
The bottom line: July’s inflation report wasn’t strong enough to cause mortgage rates to fall significantly, but it also gave bond investors little reason to push rates higher. With energy, core and shelter inflation all showing signs of moderation, mortgage rates may be entering a period of relative stability, assuming oil prices and geopolitical tensions remain under control.