Inflation Trends, Fed Policy, and Mortgage Rate Outlook

Consumer Inflation Cooler Than Forecasted

There was more encouraging news regarding inflation as June’s Consumer Price Index (CPI) fell 0.1% from May. This marked the first monthly decline since the start of the pandemic and helped push the annual reading lower from 3.3% to 3%. Core CPI, which strips out volatile food and energy prices, increased 0.1% for the month while the annual reading declined from 3.4% to 3.3%. All these measures were softer than estimates, as moderating gasoline and shelter costs were key reasons for the friendly numbers.

Wholesale Inflation Heats Up

The Producer Price Index (PPI), which measures inflation on the wholesale level, was hotter than expected in June while May’s readings were also revised higher. Headline PPI rose 0.2% last month, with the annual reading also up from 2.4% to 2.6%. Core PPI, which strips out volatile food and energy prices, rose 0.4% and the year-over-year reading increased from 2.6% to 3%. After June’s cool consumer inflation report, wholesale inflation surprised to the upside. While the PPI report did not move the markets when it was released on Friday, the data is important because some of the components are factored into another inflation measure called Personal Consumption Expenditures (PCE). We will need to see if this causes PCE to be hotter than expected as a result, but thus far expectations are for a low PCE reading when that data is released on July 26.

Powell Testimony Shows Fed Focused on Dual Mandate

While the Fed has a dual mandate of price stability and maximum employment, in recent years they’ve been more focused on taming out-of-control inflation, given that the labor market has been strong. However, in his testimony to Congress last week, Powell acknowledged that “elevated inflation is not the only risk we face,” as the job market has “cooled considerably.” Powell also noted that economic growth has moderated after a strong expansion in the second half of last year. Cooling consumer inflation combined with signs that the economy and job market are slowing have led to growing calls for the Fed to begin cutting their benchmark Fed Funds Rate, with growing odds that a cut may occur at their meeting on September 17-18. The inflation and labor market reports released ahead of that meeting will play a pivotal role in this decision.

Holiday Impact on Unemployment Claims

Initial Jobless Claims fell by 17,000 in the latest week, with 222,000 people filing new unemployment claims. Continuing Claims also fell by 4,000, as 1.852 million people are still receiving benefits after filing their initial claim. While Initial Jobless Claims fell to their lowest level since May, the measured week included July 4 and this could have impacted the data as people often put off filing during holiday weeks. Continuing Claims measured the week before Independence Day, so they were unaffected by the holiday. These Claims have now topped 1.8 million for the last five weeks, remaining near some of the highest levels seen in recent years and suggesting that it’s becoming harder for people to find a new job once they’re let go. Again, the Fed will be watching for any sustained rise in unemployment claims as they weigh monetary policy and the timing for rate cuts this year.

Mortgage Rates Outlook

Looking ahead to this week's mortgage rates, market sentiment is cautiously optimistic with potential for stability or slight decreases. Economic indicators such as the cooling consumer inflation and the Fed's cautious stance on rate cuts may influence mortgage rates to remain favorable for borrowers. However, ongoing geopolitical tensions or unexpected economic data releases could introduce volatility. Borrowers and potential homebuyers are advised to stay informed and consider locking in rates if favorable opportunities arise.

For further insights into mortgage rate trends, you can refer to Freddie Mac's Weekly Primary Mortgage Market Survey.