May inflation jumped, but economists say the details offer buyers a steadier picture

At first glance, last week’s inflation report looked like another setback for mortgage rates. But economists say the details tell a more balanced story for buyers trying to understand where borrowing costs may go next.

The May Consumer Price Index rose 4.2% over the past 12 months, the highest annual reading in nearly three years, Mortgage Professional America reported. Inflation matters to housing because it can make the Federal Reserve less likely to cut interest rates, which can keep borrowing costs higher for longer.

Still, economists told the publication the overall inflation rate does not tell the full story. Odeta Kushi, deputy chief economist at First American Financial, called the report “a tale of two CPIs.”

“Higher energy costs pushed headline inflation to its fastest pace in two years, but underlying inflation remained relatively contained,” Kushi wrote. “That’s likely enough to keep the Fed on hold, while leaving mortgage rate relief frustratingly out of reach for new buyers.”

Core inflation, which removes food and energy prices because they can change quickly, rose 2.9% year over year in May. Put simply: Energy costs pushed inflation higher, but the broader price picture remained more contained.

Sal Guatieri, director and senior economist at BMO Capital Markets, said the direction of inflation matters.

“Core measures of inflation have actually been falling and they’re tracking pretty close to the 2% target,” Guatieri told the publication.

For housing, the takeaway is mixed. The data does not point to quick mortgage-rate relief, but economists said the inflation picture looked less troubling after separating out food and energy prices. Kushi said demand appears to be “waiting on the sidelines, rather than disappearing altogether.”

The inflation reading comes ahead of the Fed’s meeting tomorrow and Wednesday, when officials will decide whether to hold or change interest rates.

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