Inflation Warning Could Matter More for Your Mortgage Than Your Grocery Bill
The latest CPI wards off fears of an imminent rate hike from the Fed but “inflation contagion fears” still loom, experts say.
Inflation data for July shows a consumer price index (CPI) increase of just 0.1 percent, which has put to rest concerns about an imminent rate hike from the Federal Reserve. According to Zillow’s chief economist Mischa Fisher, this is positive news for the U.S. economy and housing market. When inflation rises, interest rates typically follow, leading to higher mortgage rates and reduced home sales.
However, inflation remains below the Federal Reserve’s target rate, and the risk of rising mortgage rates has decreased. Nonetheless, concerns about inflation “contagion” persist, particularly among Realtor.com senior economist Jake Krimmel. While the latest figures provide some comfort, they are not a significant relief for Americans grappling with higher prices and elevated borrowing costs.
Food prices may only add a few dollars to weekly shopping bills, while even a slight increase in mortgage rates can add hundreds of dollars to monthly housing payments and diminish buyers' purchasing power. As housing remains the largest expense for U.S. households, accounting for 33.4 percent of total average consumer expenditures in 2024, the impact of inflation on borrowing costs is far greater than its effect on everyday consumer purchases.
Mortgage rates, set by the Federal Reserve indirectly through long-term Treasury yields, have recently risen above pre-war levels. This exacerbates the affordability crisis faced by homebuyers. Despite the Federal Reserve's expectation to keep rates elevated in the coming months, a September pause could occur following a weaker-than-expected jobs report.
A one percentage point increase in mortgage rates could significantly impact homebuyers, reducing purchasing power. Even homeowners are not immune to inflation's effects, as higher rates can impact home-equity loans and refinancing opportunities. Talks of an Iran peace deal may offer a glimmer of hope, but it depends on the Strait of Hormuz reopening.
Despite some challenges, the housing market appears to have fared better this year, with sales activity remaining strong. The Federal Reserve's decision on future rate hikes will depend on the trajectory of inflation, particularly gas prices and core goods.
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