Consumer Price Inflation—July 2024

What happened to inflation in July

Today’s consumer price index (CPI) data showed that prices increased 0.2% in July, but the increase was driven primarily by increases in shelter costs. Annual inflation rose just 2.9%, the lowest reading since March 2021 (2.6%), down from June (3.0%), May (3.3%), and April and March readings (3.4%).

Both energy (volatile) and shelter (lagged) contributed to the monthly rise, but there have been noticeable improvements in gasoline (-2.2%) and fuel oil (-0.3%). While shelter inflation is on a disinflationary path, it is a highly lagged input into CPI so its contributions don’t reflect the current slowdown we’re seeing in the housing market.

We anticipate that as the shelter pig works its way through the CPI python, we’ll continue to get better readings through the remainder of the year.

Today’s data has reassured markets that they will get a rate cut in September and December. July inflation came in below the 3% rate in June, and when combined with the softer-than-expected July jobs report, this data could pave the way for more than the expected 25 bps cut in September.

Going forward, the lower the inflation rate and the smaller the jobs growth rate, the higher the probability will be that the Fed would increase the cut to 50 bps from 25 bps next month.

Since today’s CPI report met expectations, we haven’t seen any real change in the 10-year Treasury yield. We expect stable Treasury yields and thus mortgage rates until the next PCE and jobs reports are released.

In the medium run, we expect the economy to land softly and housing inventory to continue to recover. This should put downward pressure on mortgage rates this fall and winter and will set the stage for a much better season for homebuyers in 2025. Last, in our midyear housing forecast update released today, we have downwardly revised our mortgage rate expectations at year’s end to 6.3%