The Bottom Line
This week brought some welcome relief for mortgage rates as two major inflation reports gave the bond market reasons for optimism.
The Consumer Price Index, or CPI, increased just 0.1% in July, while annual inflation eased from 3.5% to 3.4%. Core inflation, which excludes food and energy, also moved lower on an annual basis, falling from 2.6% to 2.5%.
The following day, the Producer Price Index, or PPI, was unchanged for the month. While some underlying components of the PPI report remained elevated, the headline number was another encouraging data point for markets.
Mortgage rates responded favorably. According to Mortgage News Daily, its average 30-year fixed mortgage rate fell from 6.79% on August 11 to 6.69% on August 13.
That 0.10% improvement is certainly welcome news for buyers, but we are not ready to call it a larger rate rally just yet.
The next big question is what this week’s inflation data means for the Federal Reserve when it meets again in September.
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What Did the Latest CPI Report Show?
The July CPI report was an encouraging inflation reading.
According to the Bureau of Labor Statistics, consumer prices increased just 0.1% from June to July. On an annual basis, inflation declined slightly from 3.5% to 3.4%.
Core CPI was also encouraging. Prices excluding food and energy increased 0.2% for the month and 2.5% over the past year, down from 2.6% in June.
Housing costs remain an important part of the inflation picture. Shelter costs increased 0.1% in July and accounted for roughly two-thirds of the overall monthly CPI increase.
Why does that matter?
Housing has been one of the stickier components of inflation. Continued moderation in shelter costs could be important if we are going to see inflation move sustainably lower.
July marked the second consecutive month of softer inflation data. Inflation is still a concern, but it suggests that some of the price pressures we saw earlier this year may be losing momentum.
PPI Added Another Important Piece to the Inflation Picture
The inflation news continued the following morning with the release of the July Producer Price Index.
While CPI measures changes in the prices consumers pay, PPI measures changes in prices received by producers. Both reports can give financial markets important clues about the direction of inflation.
Headline PPI was unchanged in July after declining 0.1% in June.
Digging deeper into the report, the picture was more mixed.
Prices for final demand goods fell 0.7%, helped by a 3.1% decline in energy prices. Final demand services, however, increased 0.2%. The BLS measure of final demand excluding food, energy, and trade services increased 0.4% for the month.
On an annual basis, headline PPI remained elevated at 4.7%.
But when you combine an unchanged headline PPI reading with the softer CPI report from the previous day, markets received two inflation reports that did not give investors a reason to become significantly more concerned about inflation.
For mortgage rates, that matters.
Why Did Mortgage Rates Improve?
Mortgage rates are heavily influenced by the bond market, particularly expectations surrounding inflation, economic growth, and future Federal Reserve policy.
That’s why reports like CPI and PPI can have such an immediate impact on rates.
When inflation appears to be cooling, investors have less reason to expect more restrictive monetary policy from the Fed. That can help bond yields move lower, which can create a better environment for mortgage rates.
Mortgage News Daily’s daily rate index illustrates exactly what happened this week.
Its average top-tier 30-year fixed rate was 6.79% on August 11. It improved to 6.74% following the CPI report on August 12 and then moved another 0.05% lower to 6.69% on August 13.
That’s approximately a 0.10% improvement over two days.
For buyers, that is certainly a move in the right direction.
Is This the Beginning of a Bigger Mortgage Rate Rally?
This week’s improvement is welcome, particularly after the rate volatility buyers have experienced recently.
But two favorable days don’t establish a long-term trend.
For mortgage rates to make a more meaningful and sustained move lower, the bond market will likely need to see continued evidence that inflation is cooling without another significant acceleration in prices.
Employment data will also remain important.
The Fed is balancing two sides of its mandate: maintaining price stability while also paying attention to the strength of the labor market.
That means inflation is a major part of the equation, but it isn’t the only part.
There is still plenty of economic data to come before the Fed makes its next decision.
What Does This Mean for the Fed’s September Meeting?
The Federal Reserve’s next policy meeting is scheduled for September 15 and 16.
The latest inflation data gives the Fed more information to consider as it approaches that meeting.
The CPI report was encouraging, and the headline PPI number did not show a monthly increase. Two relatively soft CPI reports in a row should ease some concerns that inflation pressures were beginning to accelerate again.
That could give the Fed more room to remain patient in September.
But September is still several weeks away, and there will be additional economic reports between now and then.
In fact, another PPI report is scheduled for September 10, followed by CPI on September 11, just days before the Fed meeting.
That means the Fed will have another important round of inflation data before making its decision.
So while this week’s numbers moved the conversation in a more favorable direction, I wouldn’t assume we already know what the Fed is going to do.
What This Means for Northern Virginia Homebuyers
The biggest takeaway is not to wait for a dramatic headline about rates.
Even relatively small rate improvements can make a difference, especially at Northern Virginia home prices.
A buyer who ran numbers several weeks ago may have a different monthly payment today. Depending on the scenario, a lower rate could improve affordability, increase purchasing power, or simply make a payment feel more comfortable.
This is especially relevant for buyers who paused their search because they were hoping rates would improve.
The latest inflation reports don’t guarantee that rates are headed substantially lower, but they do create a good reason to reopen the conversation and update the numbers.
There’s another very important point to understand: the Fed does not directly set mortgage rates.
Mortgage rates can move well before a Fed meeting because financial markets are constantly pricing in expectations for inflation, employment, economic growth, and future monetary policy.
This week is a great example.
Mortgage rates improved following the CPI and PPI reports even though the Fed hasn’t changed anything.
Key Takeaways
- CPI Moved in the Right Direction: July CPI increased just 0.1% for the month, while annual inflation eased from 3.5% to 3.4%.
- Core Consumer Inflation Also Improved: Core CPI came in at 2.5% year over year, down from 2.6% in June.
- PPI Added Another Encouraging Headline: Producer prices were unchanged in July, although some underlying measures remained elevated. It was another reason for markets not to become more concerned about an immediate inflation acceleration.
- Mortgage Rates Responded: Mortgage News Daily’s average 30-year fixed rate improved from 6.79% on August 11 to 6.69% on August 13.
- Don’t Call It a Rate Rally Yet: The latest numbers are encouraging, but we need more consistent inflation and economic data before assuming mortgage rates are entering a sustained move lower.
- September Is the Next Big Fed Decision: The Fed meets September 15 and 16, with another round of CPI and PPI data scheduled to arrive just before that meeting.
Final Thoughts
This week brought some encouraging news for the mortgage market.
CPI showed additional signs of cooling, headline PPI was unchanged, and mortgage rates improved by approximately 0.10% over two days.
That’s a positive development, but I wouldn’t make the leap from a couple of encouraging inflation reports to assuming rates are about to fall significantly. There is still plenty of economic data ahead, and mortgage rates can move quickly in either direction as expectations change.
For buyers who have been sitting on the sidelines, this is a good reminder that the numbers are constantly changing. Rather than trying to perfectly time the market, working with a trusted local lender to develop a smart financing strategy can help buyers understand what works today while staying prepared to take advantage if rates improve.
As always, if you have questions about mortgage rates, the Fed, or a specific financing scenario, I’m always happy to help.