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Inflation slowed to 3 percent annual growth and ticked up 0.3 percent in June — marking a gradual decline greater than most economists’ expectations and a steep drop from the 4 percent annual spike recorded in May.
Housing costs were again the largest contributor to inflation, accounting for more than 70 percent of the annual increase of the Consumer Price Index, the chief metric used to gauge inflation, according to data released Wednesday by the Bureau of Labor Statistics.
Economists had expected inflation to fall to an annual rate of 3.1 percent, expectations that were beat with annual inflation declining to the lowest level seen since March 2021 — but still short of the Federal Reserve’s goal of 2 percent. That means the central bank will likely resume its interest rate increases when it meets next month following a brief pause in hikes.
“Despite the positive inflation report, the Fed likely will resume its rate hikes when it meets later this month, remaining committed to raising interest rates until the magical 2 percent inflation target is met,” Bright MLS chief economist Lisa Sturtevant said in a statement.
The Fed has no meaningful tools with which to fight inflation’s primary cause — housing prices — which is drawing out its fight against runaway costs, Sturtevant explained. Its initial efforts to tamp down housing demand by raising interest rates has only limited supply further by locking homeowners into their preexisting lower rates.
“Initially, higher rates did cool housing demand, but because rates had been pushed so low by the Fed during the pandemic and then increased so quickly, the Federal Reserve’s rate increases not only reduced housing demand — as intended — but also severely limited supply by locking homeowners into homes they would have otherwise listed for sale,” she said.
The Fed paused rate hikes in June, but Federal Reserve Chair Jerome Powell strongly suggested further hikes were on the horizon.
“It may make sense for rates to move higher, but at a more moderate pace,” Powell said in June. “I want to stress one more thing, and that is that the committee decision made today was only about this meeting. We didn’t make any decision about going forward, including what would happen at the next meeting. We did not decide or really discuss anything about going to an [approach of raising rates at] every other meeting… or any other approach.”
Mortgage rates hit a new high for 2023 this week, with 30-year fixed rate mortgages hitting 6.95 percent on the heels of news that private sector employment grew by 497,000 jobs in June.
