June inflation fell, cooling Fed rate hike expectations

Inflation slowed in June amid a now-defunct Middle East ceasefire, casting doubt on a potential Federal Reserve rate hike next week.

The June Consumer Price Index (CPI) fell 0.4% on a seasonally adjusted basis, following a 0.5% rise in May, according to the U.S. Bureau of Labor Statistics. That was the largest month-over-month decline since April 2020, driven mainly by a 9.7% drop in gas prices when an agreement for a ceasefire in the U.S.-Iran conflict was signed.

First American senior economist Sam Williamson, however, noted that the bigger story was core inflation.

“Stripping out the volatile food and energy categories, core CPI held flat—its weakest reading since May 2020—as prices fell for auto insurance, apparel, and used cars,” Williamson said in a statement. “Even shelter, long the most stubborn component, cooled to a 0.1% gain, its smallest since January 2021.”

Before seasonal adjustments, inflation stood at 3.5% year-over-year in June, down from 4.2% in May, though it remains above the Fed’s 2% target.

Following the CPI data, monetary policy watchers increasingly believe the Fed will once again leave benchmark rates unchanged at their July meeting. This marks a sharp pivot from just one day ago when expectations for a rate hike were rising. As of Tuesday morning, the CME Group FedWatch Tool showed an 85.6% probability that rates will stay in the 3.50%-3.75% range, up from 58.3% on Monday.

“Still, one soft reading does not settle the inflation question, especially with the Fed’s preferred inflation gauge (PCE) still running hot,” Realtor.com senior economist Jake Krimmel said in a statement. “Two data points from May to June don’t constitute a trend for the FOMC. Fed Governor Christopher Waller said yesterday policymakers would need to see a sustained series of cooler readings, especially in core, before concluding elevated inflation is truly behind us.”

For the housing market, falling inflation — combined with a drop in Treasury yields — removes a source of upward pressure on mortgage rates in the near term. Krimmel noted that mortgage rates have hovered around 6.5% for nearly two months.

Williamson added that the data suggests rates aren’t likely headed higher in the near term. “That’s not the catalyst the housing market needs, but it’s one less headwind for a recovery still searching for momentum,” he said.

Looking forward, economists warn that conditions could change rapidly. Renewed hostilities between the U.S. and Iran have already eroded the interim agreement signed in June. On Monday, President Donald Trump said the U.S. would probably take over the Strait of Hormuz, following his declaration last week that the initial ceasefire agreement was over.

“With the Middle East ceasefire fragile and energy prices historically volatile, the durability of today’s relief will depend on whether core inflation keeps cooling in the months ahead, not just this one,” Krimmel said.

This article was written by Flávia Furlan Nunes and generated with the assistance of HousingWire Automation, then reviewed by a HousingWire editor before publication.