Please clap: Inflation cooled more than expected in June

The Consumer Price Index fell 3% in June on an annual basis, a sharper decrease than economists had anticipated. It’s a shot in the arm for the housing industry, which has been battered by several years of high interest rates as the Federal Reserve tries to tamp down inflation.

The evidence that inflation is meaningfully cooling increases the likelihood that the Federal Reserve’s Open Markets Committee cuts rates in September and then at least one more time in 2024. Some traders are even pricing in the possibility of a cut in late July, though at the moment it seems a long shot.

Overall prices fell from May, and the core price index was up just 0.1%. Housing costs, the largest component of CPI and the most stubborn to date, rose 0.2% in June from May, and 5.2% year over year. It’s the slowest pace of year-over-year growth since 2022, and it’s down from a peak of more than 8% in early 2023.

After a historic run of rate hikes between March 2022 and July 2023, the Fed has held borrowing costs at 5.3% for the past year, with the intention of making several cuts in 2024. But inflation readings haven’t been as rosy as had been anticipated, though some economists say it’s because of the Fed’s reliance on flawed, lagging metrics like owner’s equivalent rent.

“If we loosen policy too late or too little, we could hurt economic activity,” Fed Chair Jerome Powell said this week. “If we loosen policy too much or too soon, then we could undermine the progress on inflation. So we’re very much balancing those two risks, and that’s really the essence of what we’re thinking about these days.”

Still, Powell did indicate in his address to Congress that he saw better balance in the economy and evidence that inflation is moving toward the 2% target.

“There is a notable distinction between ‘moving sustainably toward 2%’ and ‘hitting 2%’, and by using this language, Chairman Powell has escalated expectations that the central bank is almost ready to cut the Federal funds rate,” said Lisa Sturtevant, chief economist of Bright MLS.   

“Prospective homebuyers have been eagerly waiting for a drop in borrowing costs. Mortgage rates will fall when the Fed cuts interest rates — again, likely in September — but it is also possible to see mortgage rates come down even before the actual Fed rate cut, if the central bank assertively telegraphs their intentions.”