A surprisingly soft June CPI reading pushed inflation forecasts well below expectations, making a July 29th Federal Reserve rate hike unlikely and setting the stage for mortgage rates to ease.
Source: Original report
June CPI Comes in Well Below Forecasts
Mortgage rates are poised to decline after the Bureau of Labor Statistics released a June Consumer Price Index report that significantly undershot analyst expectations. Overall headline inflation fell 0.4% on a month-over-month basis, landing at a 3.5% annual rate, largely driven by lower energy prices. Core inflation — which strips out food and energy — came in flat at 0.0% month-over-month, against a forecasted monthly gain of roughly 0.21%.
The gap between what economists predicted and what actually materialized represents an unusually wide miss. Redfin Head of Economic Research Chen Zhao noted the last comparable forecasting error occurred in fall 2025, when a methodological decision by the BLS during a government shutdown artificially suppressed shelter inflation figures. Zhao indicated the June data does not appear to carry similar anomalies.
Broad-Based Softness Across Categories
Rather than one outlier category dragging the index lower, the June softness was widespread. Shelter costs — the single largest component of the CPI basket — rose just 0.1% month-over-month, well below the roughly 0.3% pace seen in recent months. Services prices as a whole were flat, reversing a trend of averaging about 0.3% monthly gains in prior months. Goods prices edged down 0.1%, and apparel prices dropped a notable 0.6% for the month.
Energy price declines were anticipated ahead of the release, but the additional softness across services and shelter was not, making the overall miss more meaningful for rate expectations.
Fed Rate Hike Odds Collapse Ahead of July 29th Meeting
Heading into the CPI release, futures markets had priced roughly even odds of a rate hike at the Federal Reserve's upcoming July 29th meeting. That positioning had been building on the back of hawkish signals in recent FOMC meeting minutes and public commentary from Fed officials. The softer-than-expected inflation data significantly reduces the probability of an imminent hike.
Based on the tone of recent Fed communication, policymakers are expected to hold rates steady while continuing to monitor both inflation trends and labor market conditions before making any moves.
PCE Data and Tomorrow's PPI Will Fill in the Picture
While the CPI report is encouraging, it does not tell the full story. The Federal Reserve's preferred inflation gauge — the Personal Consumption Expenditures index — will be released later this month. Economists will use tomorrow's Producer Price Index data to sharpen their PCE forecasts. It remains possible that PCE will come in somewhat higher than CPI suggests, so the full inflation picture for June is not yet complete.
Fed Chair Warsh Testifies Before Congress Today
Fed Chair Kevin Warsh is scheduled to testify before the House Committee on Financial Services this morning at 10 a.m. ET. His inaugural Fed meeting in June signaled he would offer limited forward guidance on the direction of monetary policy, but markets and analysts will closely parse any language that touches on the inflation outlook or the path for rate decisions in coming months.
