Rates Head Higher As Iran-US Conflict Continues

Inflation Finally Cools — But Will It Last?

June delivered the best inflation news we’ve seen in months. Consumer prices fell 0.4% during the month, bringing annual CPI inflation down from 4.2% to 3.5%. Core inflation, which removes food and energy, was flat for the month and slowed to 2.6% annually. The improvement wasn’t just gasoline: shelter costs rose only 0.1%, while broader services inflation was flat.

Producer prices told a similar story. The PPI fell 0.3% in June instead of remaining flat as expected, while core wholesale inflation rose a slightly better-than-expected 0.2%. Gasoline prices plunged 12%, accounting for roughly two-thirds of the monthly decline, and May’s previously reported increase was revised meaningfully lower. That suggests producers may have less pressure to pass higher costs along to consumers in the months ahead.

This was great news for mortgage rates, but it may also be temporary. Much of June’s improvement came while oil prices were falling during the pause in fighting between the United States and Iran. With strikes resuming and oil prices climbing again in July, the next inflation reports could be much more volatile. Higher energy costs affect more than the price at the pump—they can raise transportation, manufacturing and shipping costs throughout the economy. For inflation and mortgage rates to keep moving lower, oil prices need to come back down and stay there.

Warsh's First Meeting With Congress

Fed Chairman Kevin Warsh used his first congressional testimony to make one thing clear: one good month of inflation data will not be enough to change the Fed’s direction. He said the June report was not a “mission accomplished” moment and emphasized that the Fed has “no tolerance” for inflation remaining elevated. He also avoided committing to a specific path for interest rates and said future decisions would be based on the data rather than pressure from the White House.

For mortgage rates, Warsh’s tone matters almost as much as the inflation reports themselves. The good CPI and PPI readings reduced some of the market’s expectations for additional Fed rate hikes, which helped Treasury yields and mortgage rates. But Warsh does not sound eager to lower rates. If oil prices remain elevated or inflation rebounds, markets could quickly price in a more aggressive Fed and push mortgage rates higher again.

One longer-term development to watch is Warsh’s review of the Fed’s $6.7 trillion balance sheet. The Fed owns a large amount of Treasury bonds and mortgage-backed securities, and changes to how quickly those holdings are reduced could directly affect longer-term borrowing costs. Warsh said any change would be announced and explained well in advance, but a faster reduction could place upward pressure on Treasury yields and mortgage rates. A slower approach could be more supportive of rates.

Single Family Housing Starts Fall

The headline housing-starts number looked strong in June, rising 19%, but nearly all of that growth came from the multifamily sector. The numbers that matter most for future homebuyers moved in the opposite direction. Single-family housing starts slipped 0.2% to an annual pace of 895,000 homes and were down 3.2% from a year earlier. Permits for future single-family construction fell 2.4% to 871,000 and were also slightly lower than last year.

Builders are dealing with the same affordability problem as buyers: elevated mortgage rates, higher land and material costs, economic uncertainty and a growing supply of unsold new homes. That is causing them to slow future construction despite the country’s long-term shortage of housing—especially entry-level homes.

Fewer permits and starts mean fewer homes will be completed, which could keep supply tight and prevent home prices from falling meaningfully once demand improves. As always, these are national figures. New-home inventory, builder incentives and construction activity can vary significantly from one city—and even one neighborhood—to another.

What to expect this week?