Mortgage rates are headed up again after the latest inflation data showed tariffs on imports are starting to be passed on to consumers in the form of higher prices.
The latest reading of the consumer price index (CPI) released by the Bureau of Labor Statistics on Tuesday showed annual inflation moving away from the Federal Reserve’s 2 percent goal for the second month in a row.
Annual inflation climbing back from April low
The cost of goods and services rose 2.67 percent from a year ago in June, up from 2.31 percent in April and 2.35 percent in May, the CPI data showed.
Core CPI — which is seen as a better indicator of inflation trends because it excludes volatile food and energy costs — showed prices were up 2.91 percent in June from a year ago.
Although month-over-month price increases were in line with forecasts, the latest CPI report is a “knock-out punch to the tariff inflation deniers,” Pantheon Macroeconomics Chief U.S. Economist Samuel Tombs said in a note to clients.
Prices rose “especially sharply for goods which are primarily imported, and less quickly for those that are mainly made in the U.S.,” Tombs noted.
Samuel Tombs
“Looking ahead, we continue to envisage a total 1 percent uplift to consumer prices overall from the current tariffs, with the biggest sequential increase in goods prices in July,” Tombs wrote. “The risks are skewed towards a bigger uplift, given the threats of additional reciprocal rates from Aug. 1, and the possibility that exemptions for goods such as pharmaceuticals and semiconductors eventually end.”
Yields on 10-year Treasury notes, which often predict where mortgage rates are headed next, climbed six basis points Tuesday, to 4.49 percent.
Investors who fund government debt and most mortgages are demanding higher yields because they’re certain the Federal Reserve will not cut short-term rates this month. They’re also beginning to doubt whether central bank policymakers will be ready to cut rates in September.
Sam Williamson
“While a September rate cut remains a possibility, today’s report likely reinforces the Fed’s cautious stance on rate moves,” First American Senior Economist Sam Williamson said in a statement. “With inflation signals still mixed, the Fed appears inclined to wait for clearer evidence before making any policy moves.”
The CME FedWatch Tool, which tracks futures markets to predict the probability of future Fed moves, showed investors on Tuesday pricing in a 44 percent chance of a Sept. 17 rate cut, down from 63 percent on Monday.
Federal Reserve Chair Jerome Powell and other Fed policymakers have been resisting the Trump administration’s pressure to cut rates, saying they need time to assess the economic impacts of tariffs, tax cuts, immigration and regulation.
The 18.7 percent average effective tariff rate already imposed by the Trump administration is expected to push prices up by 1.9 percent this year, costing the average household $2,500, according to a July 11 analysis by the Budget Lab at Yale.
The Trump administration has notified 25 countries that they’ll face higher tariffs beginning Aug. 1 if they don’t sign trade deals, the Associated Press reports.
Mortgage rates had been on the retreat in June on hopes that higher tariffs can be avoided and that inflation will continue to ease.
Mortgage rates trending up again
Rates on 30-year fixed-rate mortgages came down by a quarter of a percentage point between May 21 and July 1, to 6.64 percent, according to lender data tracked by Optimal Blue.
Would-be homebuyers rushed to file applications with lenders during the week ending July 4 as more inventory came on line and mortgage rates dipped to the lowest level in three months.
But a strong June jobs report and the Trump administration’s threats to impose new tariffs in August have rates on the rise again.
Investors are betting that the latest CPI report will make Fed policymakers more cautious about the timing and extent of future rate cuts.
The Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) price index, rose from 2.19 percent in April to 2.34 percent in May, the Bureau of Economic Analysis reported on June 27. The PCE price index for June is scheduled to be released on July 31.
Although the Trump administration is eager to see lower rates for borrowers — including the U.S. government — the Fed doesn’t have direct control over long-term rates on bonds and mortgage-backed securities (MBS).
When policymakers at the central bank cut rates by a full percentage point at the Fed’s final three meetings of 2024, mortgage rates moved by about the same amount in the opposite direction, as incoming economic data suggested inflation was on the rise again.
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