Why cooler PCE inflation data won’t fix today’s mortgage rates | Louis Velazquez - Official Website, Entrepreneur, Finance, Technology

June’s cooling PCE data looks like good news for homebuyers, but high oil prices and Fed caution mean mortgage rates won’t drop anytime soon.

On July 30, the Bureau of Economic Analysis released the June Personal Consumption Expenditures price index. The PCE is a key measure of inflation.

And the June PCE is an inflation report people have been waiting on.

Why the June PCE is important for homebuyers

The Federal Reserve decided to keep the federal funds rate at 3.50%-3.75% at its July meeting. But three of the 12 members dissented — they wanted to hike the rate to help fight inflation.

The Fed’s rate decision impacts mortgage rates. And with inflation under a microscope after the July meeting, any inflation news will likely affect mortgage rates, too.

“Between now and the September meeting, inflation reports will be the Fed’s main focus,” Jeff DerGurahian, chief investment officer and head economist at loanDepot, said in a statement shared with TheStreet.

“Unless there is a major technology-sector sell-off or a couple of very weak labor reports, the market will be watching to see whether elevated oil prices begin to bleed into core inflation and those readings will likely shape whether the Fed’s next move comes in September, October, or later in the year,” DerGurahian continued.

The Consumer Price Index (CPI) is another well-known inflation report. But the PCE is the Fed’s preferred report for inflation data and monetary policy decisions.

So the PCE is critical for potential homebuyers for two reasons. First, it can give us insights into what the Fed could do at its September meeting.

Second, mortgage rates typically increase when inflation accelerates and decrease when inflation cools.

What the June PCE inflation data revealed

The June PCE index decreased 0.1% since May and increased 3.7% year over year. Both of these outcomes were in line with economists’ expectations.

The core PCE, which omits the volatile categories of energy and food, increased 0.1% month over month and 3.3% year over year. The annual inflation rate met expectations, and the monthly rate was even better than anticipated — analysts had projected a 0.2% increase.

Inflation has cooled overall since May. But this improvement is misleading.

The PCE was 4.1% in May, and now it’s down to 3.7%. The May core PCE was 3.4%, and it was 3.3% in June.

The Federal Reserve’s target inflation rate is 2%. The June PCE and core PCE showed some improvements, but inflation still has a long way to go.

PCE inflation had increased 4.1% in May but 3.7% in June.

Riska / Getty Images

How the PCE could affect mortgage rates

Just a few hours after the BEA released the June PCE data on July 30, Freddie Mac published the national average mortgage rates from the past week.

The average 30-year fixed mortgage rate was 6.66% — an annual high and a 0.08% increase from the previous week. As rates inch closer to 7%, homebuyers are probably hoping cooler inflation data will push home loan rates back down.

My analysis is that mortgage rates might tick down briefly in response to the latest PCE data. But there probably won’t be long-term relief.

More Mortgage Rates:

Remember, President Trump declared the ceasefire with Iran had ended on July 10. Brent crude oil prices have increased since this announcement, per Business Insider, which can have a ripple effect on inflation.

Realtor.com wrote that when we look back at the June PCE data later, the cooler inflation may “look more like a backward-looking low point than the start of a durable slowdown.”

So, although June inflation data looks better, I expect the July report (released in August) to be less reassuring.

Looking ahead at inflation and mortgage rates

In my years of reporting on mortgage rates, I’ve seen many factors affect them. In today’s market, the war with Iran and inflation are probably the two strongest influences on rates.

And the two are interwoven. As the war continues, oil prices stay high, and that seeps into inflation on other goods and services.

“For mortgage rates to move meaningfully lower, the market will likely need to see oil prices settle and inflation remain under control,” DerGurahian said.

The next Federal Reserve meeting is September 15-16. Here are three inflation reports to watch leading up to this meeting:

Aug. 12: Consumer Price Index data (July)
Aug. 26: Personal Consumption Expenditures data (July)
Sept. 11: Consumer Price Index data (August)

July and August data should have a bigger impact on the Fed’s decision about whether to hike, cut, or maintain the federal funds rate.

At the time of writing, the CME FedWatch tool foresees a Fed rate hike at the September meeting. If this continues, investor sentiment will likely push mortgage rates higher in the weeks leading up to the meeting.

Unfortunately, it looks like we’re stuck with mortgage rates over 6.5% for a while. Unless something unexpected happens with either inflation or the war with Iran.