Mixed inflation news signals ‘cloudier’ path for mortgage rates
While short-term interest rate cuts are still on the table, “a Fed cut doesn’t guarantee relief,” especially when looking at recent rate trends.
Inflation didn't come in as hot as some economists feared, but there are signs that tariffs are beginning to impact economic data — and that could keep mortgage rates elevated.
The overall Consumer Price Index held steady in July, coming in at 2.7%, according to the U.S. Bureau of Labor Statistics. Core inflation — which omits the volatile food and energy sectors — rose 0.3% in July compared to June, pushing the annual rate to 3.1%.
The monthly increase in core inflation was the largest since January.
A September rate cut still likely: When considered alongside the weak jobs report released earlier this month, that uptick probably won't be enough to deter the Federal Reserve from cutting short-term interest rates at its next meeting.
"Even with core inflation at 3.1%, the fact that overall inflation did not increase in July suggests that the Fed will cut rates in September, probably by a quarter of a percentage point," said Lisa Sturtevant, chief economist at Bright MLS.
Mortgage rates might not budge: Even if the Fed takes action next month, that may not do much for mortgage rates, which are influenced by a number of factors. In 2024, for example, the Fed cut rates three times between September and December — and after two of those cuts, mortgage rates increased. The 30-year mortgage averaged around 6.2% at the time of the September cut; by the end of the year, it was approaching 7%.
"Importantly, a Fed cut doesn't guarantee relief, as 10-year Treasury yields, inflation expectations, and other market reactions all factor in," said Jake Krimmel, senior economist at Realtor.com. "If inflation runs hotter, the path for mortgage rates gets cloudier, with markets likely keeping borrowing costs higher for longer."
Tariff impacts: The Federal Reserve will get updated labor and inflation reports next month prior to its September meeting, providing the board with a better picture of how tariffs are impacting the economy. For now, the effects remain muted, said Sam Williamson, senior economist at First American.
"Some tariff-sensitive areas, like men's and women's apparel, even saw price declines — suggesting businesses may still be absorbing cost pressures," Williamson said.
Items that rose significantly in July included airline fares and used cars and trucks. New car prices, which are expected to rise because of tariffs, were flat in July.
Market reaction: The stock market reacted positively to the inflation report, with the Dow Jones rising more than 1% by mid-day.
The 30-year fixed-rate mortgage average was unchanged at 6.58% soon after the report was released, according to Mortgage News Daily. Mortgage rates had been trending downward following the Aug. 1 jobs report, with the Freddie Mac average hitting a four-month low last week.