The Federal Reserve board of governors will meet next week at the Federal Open Market Committee (FOMC) to vote on how to adjust interest rates. When they meet, they will have a new measure of inflation data to consider.
The consumer price index (CPI), an inflation gauge overseen by the U.S. Bureau of Labor Statistics, was up 0.4% in August after rising 0.2% in July. This brings annual inflation in the CPI’s all-items index up to 2.9% before seasonal adjustment, compared to 2.7% in July. This means that annual inflation is currently continuing to inch up further away from the Fed’s goal of 2%.
The index for shelter costs rose by 0.4% and was the largest contributor to the increase in the all-items index. Excluding the food index (which rose 0.5%) and the energy index (which rose 0.7%), the all-items index posted a 3.1% annual increase. Realtor.com® Senior Economist Jake Krimmel projected that higher food and energy costs could be the result of tariffs; other tariff sensitive goods such as cars, new and used, and home furnishings also reported price increases per the CPI.
“While it remains to be seen whether tariffs will result in a one-time jump or a more recurrent increase in price levels, their staggered rollout suggests effects will be felt across multiple reports rather than in a single month, making inflation data harder to interpret in real time,” said Krimmel.
Bright MLS Chief Economist Lisa Sturtevant shared remarks stating what this could mean for a rate cut, given the possibility that inflation will “take off again.”
“It would have taken a much higher inflation reading to quell expectations for a rate cut next week. The weak employment report in August, followed by the dramatic downward revisions to earlier job numbers, provides clear signals that labor market conditions are weakening,” Sturtevant explained. “Even though inflation has inched up again and remains above the 2% target, the Federal Reserve is giving more weight to the labor force numbers and will cut rates to help stave off further deterioration.”
Indeed, the stock market has reported a boost following the CPI’s publication, a sign that traders and investors still expect an interest rate cut to be coming shortly.
However, Sturtevant predicted that the rate cut will only be 25 basis points due to increasing inflation figures, and that future rate cuts will likely be contingent upon inflation improving. Krimmel made similar comments about the Fed’s outlook going past its September meeting.
“Even though a 25 basis point cut next week seems all but certain, the combination of firmer inflation and weaker labor market data complicates the Fed’s picture going forward,” said Krimmel. “With inflation above target and still rising, plus jobs momentum slipping, the Fed faces a difficult balancing act on both sides of its dual mandate.
“For the housing market, persistent inflation has two major implications: it erodes consumer purchasing power and puts upward pressure on mortgage rates,” explained Krimmel, as higher inflation means consumers will have lessened ability to save for a home purchase.
“Renewed inflationary pressures could keep borrowing costs elevated for longer, especially if the recent 11-month low in rates simply reflects a September Fed cut already priced in,” he added.
Projecting what the CPI suggests for the housing market, Sturtevant cautioned that this inflation uptick is “another cautionary sign.”
“The Census Bureau reported that in 2024 income gains in the U.S. were in essence erased by inflation, leaving many households worse off than they were a year earlier,” said Sturtevant. “As economic uncertainty increases and consumer debt continues to rise, prospective homebuyers are going to continue to be cautious. The result likely will be a slow housing market this fall, leading to an overall 2025 market with sales below last year’s level.”
For the full CPI, click here.
