What happened: The Consumer Price Index (CPI) rose 0.2% in July after increasing 0.2% in June. Core CPI rose 0.2% month-over-month compared to 0.2% in June. 

What it means: Headline inflation increased less than expected in July. Core inflation continued to decline on a year over year basis. Further disinflation despite the stronger economic outlook and the large size of recent US debt issuance should hold back the rise in Treasury yields which mortgage rates tend to follow.

What Zillow Senior Economist Orphe Divounguy thinks: Today’s report was good news on the inflation front. Although the pace of disinflation has slowed, core inflation declined further. 

While core inflation remains high when compared to the Federal Reserve’s target, and shelter costs are still the largest contributor to the core CPI monthly gain, the rent components of the consumer price index are expected to continue to move lower. This is because rent increases have already fallen much more than what is reflected in the CPI calculation. Annual growth of the Zillow Observed Rent Index (or ZORI) – a measure of market rent – has fallen to 3.6% from a peak of 16% in February 2022.

With housing inflation in the CPI expected to continue to fall, the decline in core inflation is another step in the right direction. The pace of economic growth has accelerated in recent months and US Treasury auctions have pushed Treasury yields higher. However, further disinflation in the coming months should keep a lid on the recent increase in yields that mortgage rates tend to follow, providing potential savings and a hopeful outlook for many prospective home buyers.

Numbers to know: 

• The Consumer Price Index (CPI) increased 0.2% in July after increasing 0.2% in June. Consumer prices were 3.2% higher when compared to a year ago up from 3% in June.
• Core CPI increased 0.2% in July and is now up 4.7% from a year ago, down from 4.8% in June.
• The shelter component of CPI still leads the price gains. However, the annual increase in shelter costs continued to fall as predicted by the past year’s slowdown in ZORI. The shelter index is up 7.7% year-over-year down from 8.2% in March.
• Rent of primary residence is now up 8% from a year ago, down from 8.8% in March.