Inflation cooled significantly in June, primarily due to a decline in the price of oil, as housing experts brace for how lower consumer prices might impact mortgage rates.
Inflation fell to 3.5 percent last month after a sharp rise in May, according to the Bureau of Labor Statistics. That was welcome news to a real estate industry that has been slogging through four years of lower home sales partially driven by higher interest rates.
Excluding the price of food and energy, however, inflation rose 2.6 percent in June, slightly above the Fed’s target of 2 percent.
Sam Williamson, senior economist at First American, said the good news from the report is less about price shocks and more a signal that the Fed may not have to hike rates when it meets toward the end of this month.
Sam Williamson
“For homebuyers, the key takeaway is less about relief on the horizon and more about the absence of a new setback,” Williamson said. “Because mortgage rates often take their cues from the inflation outlook, a hotter report could have pushed borrowing costs higher and stretched affordability even further.”
“Instead, today’s data suggest rates aren’t likely headed higher in the near term,” Williamson said. “That’s not the catalyst the housing market needs, but it’s one less headwind for a recovery still searching for momentum.”
Much of the slowdown in inflation came from a drop in the price of oil as the U.S. war with Iran continued to show its impact on the economy.
Crude oil futures spiked to a high point of over $112 a barrel in April before embarking on a see-saw driven largely by ongoing negotiations to end the war. Prices fell to around $68 a barrel in early June, helping to bring down inflation.
Selma Hepp
“The energy index was the largest contributor to the monthly all items decrease, more than offsetting increases in other indexes, including those for shelter and food,” the Bureau of Labor Statistics said in its release on Tuesday.
Selma Hepp, chief economist at Cotality, said that oil prices are expected to remain volatile.
“The Federal Reserve is publicly signaling a shift toward raising interest rates later this year. We’ll have a better sense in two weeks’ time, but will they hike or hold?” she said in a statement. “I give it a 50/50 chance, particularly as the Fed’s latest ‘dot plot’ revealed half of FOMC members projected at least one rate hike before the end of the year.”
