The U.S. Bureau of Labor Statistics released its Consumer Price Index and it showed that overall inflation came in cooler than expectations of 0.4% at 0.37% for the month of April. Annual inflation cooled as well and declined from 5% to 4.9%, which was also lower than expectations. The main focus, Core CPI, which removes volatile food and energy prices, rose 0.41% in April, which was in line as expected. Year over year, Core CPI declined from 5.6% to 5.5% which was slightly lower than estimates.
Digging deeper into this report, the shelter component rose by 0.4% and has certainly been decelerating. Year over year shelter rose by 8.1% which was less than the 8.2% previously reported. It does appear that shelter costs are no longer accelerating on a year-over-year basis and have reached a peak and have started to crest.
The summer months should be favorable for rates, as this shelter component continues to catch up within this report since it is such a lagging part of the index. As shelter catches up, it will push inflation lower in the CPI.
Once this inflation report was released, bond prices increased slightly which caused mortgage rates to improve incrementally. The bond market and interest rates hold an inverse relationship. When bonds increase in price, mortgage rates drop, and vice versa.
Also, because this CPI report showed a cooling of inflation, all eyes will be on the Fed to see if they will take a second look at their next move. Following the lower inflation data, the Fed Futures market is now pricing in a 100% chance of a 25 basis point rate cut in September, clearly not believing the Fed, who is saying they will not cut this year. This could also help Bond prices if they cut in this current environment, it would indicate their goal is being met by curbing inflation, and in turn, it will help improve or lower mortgage rates going forward.