June CPI Report and Fed Testimony: What Realtors Need to Know

Inflation came in cooler than expected this week, and Fed Chair Kevin Warsh gave his semiannual testimony to Congress. Here is what happened and what it means for mortgage rates.

Inflation Cooled More Than Expected

The Consumer Price Index for June showed headline inflation fell 0.4%. Experts had only expected a small drop of 0.1%. Year over year, inflation fell from 4.2% down to 3.5%, well below the 3.8% to 3.9% the market was expecting.

A big reason for that drop was gas prices, which fell nearly 10% for the month. That said, oil prices have already started climbing again this month because of tension in the Persian Gulf, so this particular win could be short lived.

Core Inflation Was Even More Encouraging

Core inflation, which strips out food and energy prices, came in flat at negative 0.02%. That is much better than the 0.2% increase that was expected. Year over year, core inflation slowed from 2.9% down to 2.6%.

Shelter costs make up nearly 45% of the core reading, and shelter is finally starting to calm down too. It only rose 0.1% for the month, which is a sign that real time rental prices are finally showing up in the data. Car insurance costs also fell 2%, giving the report another boost.

Services inflation, which has been one of the stickiest parts of this whole story, was flat. If you strip shelter out of the core number entirely, everything else combined actually fell 0.07%. That is about as tame as inflation data gets.

Fed Chair Warsh Testified to Congress

Kevin Warsh gave his prepared remarks to the House this morning, with the Senate hearing tomorrow. He is not known for giving much forward guidance, so the real fireworks usually come during questions, not the prepared remarks. Still, his written testimony gave a few useful hints.

On inflation, Warsh pointed to short term price pressure from energy, tariffs, and AI related investment. He said longer term inflation expectations still line up with the Fed's 2% target, and a measure called trimmed mean inflation actually moved lower since May. He did flag that housing is still lagging. Overall this reads as fairly dovish. He is blaming inflation on supply issues rather than runaway demand, which is typically a sign a Fed chair is not itching to raise rates.

On the labor market, Warsh described things as stable after a period of cooling. Layoffs are subdued and job openings are roughly flat. He acknowledged that the low unemployment rate has a lot to do with fewer people entering the workforce, not necessarily strong hiring. That lines up with what we saw in the June jobs report, where the drop in unemployment came from people leaving the labor force rather than from a hiring boom.

On the economy, Warsh said growth is holding at a solid pace even with uncertainty coming from the Middle East. He noted the economy's productive capacity is rising, which is helping offset a slower growing workforce.

On financial conditions, the market is currently pricing in a higher Fed funds rate. That reflects both worries about Middle East driven inflation and growing confidence that the labor market is stable.

Warsh also mentioned five task forces he has created inside the Fed, each starting from first principles to reexamine current practices. Expect him to stay fairly tight lipped in the Q&A and let those task forces do their work before he commits to much of anything.

What This Means for Mortgage Rates

Mortgage bonds sold off yesterday and closed just below a key support level. They bounced back this morning once the cooler CPI numbers came out, but there is a reason for some caution. Rising oil prices tied to the situation in the Strait of Hormuz could work against these gains as the day goes on.

The 10 year Treasury yield broke above a resistance level yesterday but has since fallen back beneath it. Yields have already given back half of the drop they saw right after the CPI report came out.

The Bottom Line for Your Clients

This was a genuinely encouraging inflation report, and it gives the Fed more room to hold off on rate hikes. But between rising oil prices and a Fed chair who is choosing his words carefully, this is not a guaranteed straight line toward lower rates. If you have buyers or sellers asking whether now is the time to move, let them know the trend is favorable, but it is still a week by week story worth watching closely.

Have a client with questions about how this affects their specific numbers? Send them my way. I am always happy to walk through it with them.

Kurt Kessler Mortgage Broker, Barrett Financial Group NMLS #365130