The downward trajectory of U.S. inflation has held firm as the latest Consumer Price Index (CPI) released this morning provided further evidence that the Federal Reserve’s efforts to get the economy back on track are working.
The U.S. Bureau of Labor Statistics reported that the CPI hit 3% in June, down a percentage point from May’s reading. Not only did this beat expectations heading into the report’s release, but June’s data also marked inflation’s lowest level since March 2021.
Core inflation, which excludes more volatile food and energy costs, also showed signs of cooling last month, offering favorable signs as it rose 4.8% in June from a year earlier—the slowest pace since October 2021 and down from 5.3% in May.
The reading comes nearly a month after Fed officials opted to pause its rate hike campaign for the first time since it embarked on its journey to reel in inflation 15 months ago. With inflation now at a third of where it was a year ago, all eyes will be on the Fed when it heads into its next meeting this month.
Favorable as the data may be, inflation is still well above the 2% benchmark. While Fed officials opted to keep the Federal Funds Rate between 5% and 5.25% in June, they signaled that at least two more rate hikes were likely to happen before the end of the year.
“In determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” the Fed said in a June statement following its meeting.
At the time, the CPI had beaten expectations, hitting 4%, which many pundits and onlookers in the real estate industry believed was convincing enough to warrant a reprieve from more rate hikes.
However, minutes from that June minute indicated that several Fed officials would have supported another rate hike last month because “momentum in economic activity had been stronger than earlier anticipated, and there were few clear signs that inflation was on a path to return to the Committee’s 2% objective over time.”
While June’s CPI reading shows that the economy is on the right track, real estate folks seem to think it may not keep the Fed from resuming rate hikes in its July meeting.
“Despite the positive inflation report, the Fed likely will resume its rate hikes when it meets later this month, remaining committed to raising interest rates until the magical 2% inflation target is met,” said Dr. Lisa Sturtevant, Bright MLS chief economist, in a statement.
“Raising rates further—leading to higher mortgage rates—will not solve the fact that housing is contributing to keeping inflation elevated,” she said, adding that housing should not be treated like other goods and services in the CPI’s basket.
Sturtevant pointed out that housing costs, which account for a large share of the inflation picture, are not coming down meaningfully and still playing a part in keeping inflation elevated.
The index for shelter was the largest contributor to the inflation increase last month, accounting for over 70% of the increase. The cost of shelter—widely viewed as a lagging indicator when looking at inflation—rose 7.8% annually in June.
“The Fed does not have the right tools to tackle high housing costs in the U.S.,” Sturtevant said. “Initially, higher rates did cool housing demand, but because rates had been pushed so low by the Fed during the pandemic and then increased so quickly, the Federal Reserve’s rate increases not only reduced housing demand—as intended—but also severely limited supply by locking homeowners into homes they would have otherwise listed for sale.”
Dr. Lawrence Yun, chief economist for the National Association of REALTORS® (NAR), pointed out that rents, while still climbing at a “brisk pace,” have turned a corner.
“Rents were rising at 8.8% in the early part of the year, so this is the slowest gain in seven months,” he said in a statement. “The one-month rent gain of 0.5%—or a 5.8% annualized gain—is suggesting further calming in rents in upcoming months. Moreover, with so many empty apartment units under construction, rents could plateau by this time next year.”
Yun also indicated that decelerating consumer prices could steadily lift home sales and increase home production in a few months.
“The Federal Reserve’s mandate is to contain inflation and help the economy,” he said. “It misjudged the early strength of inflation, which got out of control. Now it could misjudge on the economic front.
“Monetary policy works with a long lag time,” he continues. “The Fed appears too focused on the lagging economic indicator of jobs rather than early indicators like future inflation and commercial leasing activity; they should look ahead and stop raising interest rates.”