Mortgage rates will remain largely unchanged after inflation came in just below expectations in June, leaving the door open for a September Fed rate cut. 

Core prices, which the Fed prefers to focus on, increased 0.23% in June, just short of the 0.25% increase expected by forecasters. Much of the miss came from declining hotel prices, as the impact of tariffs started to come through on goods prices. 

• Compared to last year, core prices (which exclude the volatile food and energy categories) increased 2.9%. This is an increase from the 2.8% reading for the past three months.
• Some tariff-related impacts are becoming apparent among goods categories, with household furnishing and video and audio electronics both up about 1% from a month ago. Similarly, apparel increased 0.4% monthly after two months of negative readings, though the level is still modest. Overall, core goods inflation remains not too concerning, but household goods were up about 1% in June, about five times the previous rate of increase.
• Services inflation is cooling, keeping overall inflation from accelerating. Shelter inflation, which makes up about 40% of core CPI, has cooled to just 0.2% monthly, the lowest level since February 2021. The decline from May to June was driven by a large drop in hotel prices (-2.9% monthly) rather than rent. Importantly for the Fed, however, shelter inflation has been expected to decline, as that metric lags market rent measures by 1-2 years. Since market rents have remained flat, we can expect CPI shelter to continue putting downward pressure on overall inflation for some time.

Inflation remains mild enough that the Fed could cut rates in their September 17th meeting if the next couple months of data are similar.

• We are unlikely to get much clarity from Chair Powell at the July 30 Fed meeting. He will want to keep all options on the table as there are two inflation reports and two jobs reports between then and the September meeting.
• The Fed is continuing to walk a delicate tightrope between a potentially deteriorating labor market and potentially accelerating inflation, both driven by elevated and uncertain tariff rates. 

Mortgage rates are unlikely to fall very much if the Fed comes through with two rate cuts by the end of the year, as markets have already priced those cuts in. 

• If these get taken off the table, however, there is room for rates to climb. 
• Mortgage rates could fall more if a recession that necessitates additional (and faster) rate cuts becomes apparent in the jobs data