Inflation Rises Lower than Expected in July

August 11, 2023

This past week home loan rates remain elevated despite consumer inflation being reported slightly lower than expected. Let's discuss what happened and look at the week ahead.

Inflation Hits 3.2%

Last Thursday, the Bureau of Labor Statistics reported the Consumer Price Index (CPI) for July at 3.2% year-over-year which was slightly lower than the 3.3% expected. What was also positive is the back-to-back 0.2% increase on a month-to-month basis. This is the slowest pace of inflation in two years.

The upcoming CPI report is one of the five reports the Fed said to watch before the next Fed Meeting in September as they decide whether to hike rates again. So, seeing this inflation reading come in slightly light may add to the notion of a Fed pause in September, especially when coupled with the recent soft Jobs Report.

There is concern inflation is going to increase in the months ahead. Why? Oil was sharply higher with the bulk of the rise in late July, where those numbers were not reflected in the CPI reading. Additionally, higher oil prices seep into food prices, which would also be on the rise.

Currently, inflation is running at a low pace and while most expect prices to come down further, oil and energy prices could be a wild card as we move into the Fall.

Moody's Downgrades Some Banks

Rating agency Moody's downgraded the credit ratings of 10 banks last Monday, citing higher funding costs, slower loan growth and profit pressures. This is an important story to follow for mortgage and housing as it could lead to tighter credit standards for banks looking to be more conservative on lending and loan growth.

This story is yet another reason for the Fed to stop hiking rates. Tighter lending conditions are akin to Fed rate hikes and hiking rates further would only make the banking issues described above worse.

Rising Oil Prices

Oil prices are $84 and one month ago, they were just $68. This is inflationary and should the rise continue, it could be a problem. Last summer we found out how painful high energy prices are. Let's hope we do not go back to those levels.

Fed Rate Hikes Futures

After the past couple of weeks with a soft jobs report, soft inflation reading and the downgrade to US debt, the markets are now pricing the probability of a Fed rate hike at just 9.5%. Moreover, now the markets are also pricing in 5 rate cuts in 2024, with the Fed Funds rate coming back down to 4.00%. For this to happen, we will need inflation to come down further and we may have to experience a recession in early 2024. This story will change over time, and we will be tracking it.

Bottom line: It would be ideal to see the 10-year Note yield move nicely back beneath 4.00%, where it is right now. If that comes to pass, we should see a resumption in the decline in mortgage rates. The opposite is true.

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