Consumer prices are rising at the slowest pace in more than two years, and economists say the Federal Reserve should not raise its interest rate again.

Inflation in June saw its smallest gain in more than two years, which translates to smaller increases in consumer prices. That could help build greater confidence among would-be home buyers to enter the housing market. “Low inflation means low mortgage rates,” says Lawrence Yun, chief economist for the National Association of REALTORS®. “Therefore, decelerating consumer prices could steadily lift home sales and increase home production in a few months.”

The Labor Department’s Consumer Price Index rose last month by only 3% year over year—a rate that's much lower than the 9% hikes of last summer and the slowest pace since March 2021. In a glimmer of hope that the fragile economy may be on the mend, prices for gas, energy and health care services are among those falling the fastest. “The economy is on a safer path today as victory over inflation is in the air,” says Chris Rupkey, chief economist for FWDBONDS, an economic research company. “Even core inflation is down in the dumps, with a 0.2% rise, which is the softest point since August 2021.”

However, the CPI’s measure of “shelter inflation” remains stubbornly high. Yun says he’s optimistic that will reverse course soon. “Rents are still climbing at a brisk pace, rising by 8.3% [year over year], but have turned the corner for sure,” Yun says. “Rents were rising at 8.8% in the early part of the year, so this is the slowest gain in seven months. With so many empty apartment units under construction, rents could plateau by this time next year.”

How Will the Fed React?

Inflation, though falling, remains above the Federal Reserve’s 2% target. The central bank has hiked its benchmark interest rate 10 times in the last year to fight inflation, but it put a pause on the increases at its meeting in June. Still, the Fed suggested it could raise rates by a quarter of a percentage point two more times this year. Factored into the Fed’s decision is the latest jobs report, which showed a sluggish monthly net gain of 209,000—the smallest in 2.5 years.

NAR Fed Funds Policy

Meanwhile, the 30-year fixed-rate mortgage averaged 6.81% last week, far above its 5.3% average a year earlier and the ultra-low 2% to 3% averages before that, Freddie Mac data shows. The housing industry is calling on the Fed to continue pausing rate hikes, which could lessen the pressure on mortgage rates.

“The Federal Reserve’s mandate is to contain inflation and help the economy,” Yun says. “It misjudged the early strength of inflation, which got out of control. Now it could misjudge on the economic front. Monetary policy works with a long lag time. The Fed appears too focused on the lagging economic indicator of jobs rather than early indications like future inflation and commercial leasing activity. They should look ahead and stop raising interest rates.”

The Fed’s next meeting is July 26.