The Consumer Price Index (CPI) was up 0.2% from June to July 2024 and up 2.9% from a year ago, according to the latest data from the U.S. Bureau of Labor Statistics. The Index measures the costs of goods and services across the American economy so as to track inflation levels; as such, it is widely described as a bellwether for the Federal Reserve’s decision-making on interest rates.
The July 2024 CPI marks the smallest annual increase in the index in three years; it was the first showing below 3% since March 2021. The monthly increase of 0.2% (up from no change in May 2024 and a decrease of 0.1% in June 2024) fell within forecaster predictions (per Bloomberg).
Experts have described the results as all but assuring the Federal Reserve will reduce interest rates in September (by how much remains to be seen). The Federal Reserve has previously said its inflation goal is 2%, but Chairman Jerome Powell has indicated the Fed is willing to lower rates should data suggest 2% inflation is on track.
“Today’s data has reassured markets that they will get a rate cut in September and December,” said Realtor.com® Senior Economist Ralph McLaughlin. “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.”
NAR Chief Economist Lawrence Yun came to the same conclusion as McLaughlin’s assessment:
“The Fed has indicated the need to normalize and move away from the current ‘restrictive’ monetary policy and its willingness to cut if inflation moves towards 2% rather than waiting to reach 2%,” said Yun.
Mortgage rates are not the only bearing the CPI has on the housing market. Housing expenses are one of the most expensive costs consumers face and so have a direct bearing on how the index is calculated (housing costs are accounted for in the “shelter” index). While breaking down the nuts and bolts of the consumer price categories, Yun described housing costs as “still high,” albeit down due to a supply increase in the rental market, but said there were still ominous signs for housing costs on the horizon.
“Shelter costs decelerated to 5%, still high but clearly trending down as a temporary oversupply of new apartment units will further dent the figures. Auto insurance continues to rocket, up by 19% from a year ago. This does not bode well for property insurance bills. Generally, the rate-cutting cycle is not one-and-done. Six to eight rounds of rate cuts all through 2025 look likely. Whoever sits in the White House in 2025 will see lower interest rates.”
Mortgage rates previously experienced a sizable drop the first week of August—the 30-year mortgage rate fell from near 7% to just under 6.5%. This drop was attributed to overarching economic uncertainty, spurred in part by a stock market drop on Aug. 5. If, as seems probable, interest rates are brought down, this could turn the mortgage rate decline into a sustained slope rather than a blip.
Yun, however, noted that both buyers and agents should not get their hopes up for a return to the home-buying frenzy of 2020-2021. “A super-sized budget deficit could limit the decline in mortgage rates. More government borrowing means less mortgage money to lend. The new normal for mortgage rates will be around 6% and definitely not to 4% as was before COVID.”
Dr. Lisa Sturtevant, chief economist of Bright MLS, said in a statement that she is confident that a rate cut is coming in September. However, she also suggested the news isn’t undeniably positive with a pointed question: “Is it possible that the Fed is too late?”
Sturtevant continued, describing how housing costs have been particularly affected by the Fed’s decision-making: “Until this month, the Fed seems to have been laser focused on inflation and progress toward the 2% target. But shelter has been an outsized contributor to the Consumer Price Index. In July, shelter accounted for nearly 90% of the monthly increase in the CPI. As the Fed has kept rates high, those higher rates have exacerbated housing costs by dampening new housing construction and increasing borrowing costs. Since May 2023, the CPI minus shelter has averaged just 1.7%.
“There is growing evidence that there is more economic uncertainty out there. While the inflation rate has come down, consumers are dealing with a cumulative increase in overall prices of more than 20% between July 2020 and July 2024. Almost everything is much more expensive now than it was four years ago, which is causing people to pull back on spending. Even with a rate cut and subsequent declines in mortgage rates, there will be some hesitant homebuyers out there who have had their finances stretched thin and have reached their affordability ceilings. The drop in rates could be too little, too late.”
For the full July 2024 CPI report, click here.
