Consumer price index dipped in July, potentially reducing chances of a Fed rate increase
The US’s annual inflation rate cooled in July despite the continuing war in Iran, a welcome sign for the Federal Reserve that could lower chances of an interest rate hike by the central bank.
The Labor Department said Wednesday the consumer price index (CPI) dropped to 3.4% last month, a percentage point lower than the June reading even as the conflict in the Middle East put upward pressure on oil prices.
That annual inflation rate remains much higher than its level before the outbreak of the Iran war in February, but central bank decisionmakers could see the slight decline as a signal that the Iran war is having less of an impact on overall prices than first feared.
Underlying measures of inflation also fell. A core reading that strips away volatile energy and food categories declined to 2.5% on a year-over-year basis, another positive indication that price growth isn’t accelerating rapidly amid wider economic unease.
The Fed has opted to hold rates steady throughout the year to date, although speculation about a rate hike in the months ahead hardened after a fresh escalation in the US-Iran war in recent weeks.
Mortgage rates don’t move directly in tandem with the Fed’s benchmark rate, but its decisions can strongly influence the direction of 10-year Treasury yields – which lead 30-year fixed mortgage rates.
Homebuyers gain ‘a little more certainty’ on mortgage rates
The national housing market has struggled this year, partly due to rising mortgage rates since February and uncertainty about the direction of the economy.
But First American’s senior economist Sam Williamson said the latest inflation reading was good news for the housing market. “Two softer inflation reports in a row should calm concerns that price pressures are reaccelerating,” he said.
“For homebuyers, that reduces the risk of another sharp move higher in mortgage rates and provides a little more certainty around borrowing costs.”
The Fed’s next decision on interest rates arrives next month – and Williamson said the new inflation figure “gives [it] more room to hold the federal funds rate steady at its September meeting, even as some parts of services inflation remain sticky.”
The news almost certainly won’t mark a gamechanger for the mortgage and housing markets – but it should mean a “somewhat steadier” outlook, according to Williamson. “That could support market activity at the margin by giving buyers more confidence that borrowing costs won’t shift sharply while they’re searching for a home,” he said.
“Combined with slower house-price growth, rising incomes and more inventory, that gives the housing market more room to rebalance gradually.”
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