Elevated mortgage rates have stymied the housing market, but underlying economic factors are likely to help propel them downward in the coming months.

The Consumer Price Index (CPI) for August showed a modest year-over-year gain of 2.5%, which is the lowest annualized growth figure since February 2021. Shelter costs — which are weighted as one-third of the index — drove much of the increase, rising 0.5% compared to compared to July and up 5.2% year over year.

Despite the overall inflation rate decrease, core inflation — which removes more volatile food and energy costs from the top-line index — rose 0.3% month over month and 3.2% year over year.

With another report showing that the rate of inflation is falling, it’s all but guaranteed that the Federal Reserve will cut benchmark interest rates next week. But the cut will likely be modest due to the unexpected acceleration of core inflation, and the mortgage market has already priced in the rate cut.

“The year-over-year CPI inflation data has told the same story for 18 months: the inflation growth rate has been falling, and headline inflation is almost back to 2% on the year-over-year data,” HousingWire Lead Analyst Logan Mohtashami said.

“The month-to-month core inflation print was hotter than expected because of our terrible way of tracking rent inflation. Mortgage rates have moved almost 2% lower since the highs of 2023 as labor data has gotten softer.”

While the rate of shelter inflation is driving the movement of the overall index, it’s down significantly from its peak of 8.2% in March 2023. Still, the monthly gain of 0.5% is the highest rate since the beginning of 2024.

Housing costs were mentioned during the presidential debate Tuesday night. It was the first issue that Vice President Kamala Harris addressed in her opening remarks and was mentioned repeatedly, although there were no housing-related questions from moderators.

Harris mentioned her plan of providing $25,000 in down payment assistance for first-time homebuyers. She also said that climate change has caused homeowners insurance premiums to rise while identifying the housing shortage as a cause of rising prices.

Republican nominee Donald Trump did not address housing costs in the debate. But he has previously said his plan to deport immigrants will soften demand for housing and thus bring down costs. Economists have expressed heavy skepticism of that plan.

In the near term, mortgage rate cuts will provide the most direct impact on housing costs, but the mild acceleration in core inflation will likely prevent the Fed from cutting rates significantly. Meanwhile, the rate decline that’s already occurred has not brought a significant number of buyers back into the market.

“Prospective homebuyers expecting mortgage rates to drop dramatically after the Fed cuts rates will be disappointed,” Bright MLS chief economist Lisa Sturtevant said in a statement. “The impact of the Fed lowering short-term rates has already been largely baked into mortgage rates, which have been falling since early July. High home prices and a lack of supply continue to be driving affordability challenges in the market.”