Economic data released this week showed an economy still cooling gradually rather than falling into contraction. Inflation came in softer than expected, retail spending held up, and the Federal Reserve found some reassurance that price pressures may be easing.
But the seemingly unending conflict in the Middle East, which has now cost over $35 billion, has pushed oil prices higher again, and with them, concerns that the recent progress on inflation could prove temporary.
Mortgage rates moved up in response. Homebuilders remain cautious amid high financing costs, and in California, tight inventory continues to prop up home prices even as the higher rates threaten to slow the gains the state saw heading into summer.
June’s inflation numbers surprised most forecasters. The Bureau of Labor Statistics reported that the Consumer Price Index fell a seasonally adjusted 0.4 percent for the month, its largest monthly decline since April 2020, bringing the annual rate down to 3.5 percent. Economists surveyed by Dow Jones had projected a smaller drop of 0.2 percent and an annual rate of 3.8 percent. Core inflation, which excludes food and energy, was flat for the month and now stands at 2.6 percent year over year, also below what forecasters expected.
Much of the relief traced back to energy. May’s inflation spike had been driven largely by a geopolitical jump in gasoline prices, but a dizzying mid-June ceasefire and the reopening of the Strait of Hormuz, sent oil prices down roughly 21 percent, to around $77 a barrel, and pump prices soon followed. That reversal accounts for much of why the headline number turned negative.
Economists were cautiously encouraged, not declaring victory. Heather Long, chief economist at Navy Federal Credit Union, said June “finally brought some relief on inflation,” adding that it takes pressure off the Fed and allows the central bank to wait and see what happens next. Morningstar senior economist Preston Caldwell called it the best news on core inflation of the year, though he noted the Fed rarely reacts to a single month of data and that the size of this one is likely to keep the central bank from moving anytime soon.
That caution centers on the same source of the June improvement: geopolitics. Goldman Sachs’ Kay Haigh wrote that while a path remains for the Fed to hold rates steady this year, the reescalation of the Middle East conflict has narrowed that path. Oxford Economics, in a note issued the same day the CPI report came out, suggested May’s reading may mark the peak for the year, given oil and gasoline kept falling into early July, though that call depends on the ceasefire holding.
Retail sales data from the Commerce Department told a similar story of gradual cooling rather than pullback. Non-inflation-adjusted retail and food service sales rose 6.7 percent from a year earlier in June, down from a revised 7.3 percent in May. Strip out gas station sales and the annual gain was 5.7 percent, barely off May’s 5.8 percent.
Auto sales rose 5.7 percent, and non-store retailers jumped 14.2 percent, likely reflecting Amazon Prime Day’s move to late June this year. Grocery store sales grew just 0.9 percent annually, and health and personal care sales grew only 0.2 percent, both soft readings that suggest some pullback on everyday spending. If that trend continues, it could weigh further on consumer spending and, with it, overall economic growth.
Housing starts nationally rebounded in June, but nearly all of the gain came from multifamily construction. Single-family starts fell for a third straight month, and building permits dropped to their lowest level in ten months, as builders pulled back in the face of high mortgage rates, rising construction costs, and softer buyer demand. Multifamily starts, by contrast, surged 76.2 percent from May and were up 17.2 percent from a year earlier, a sharp rebound after hitting multi-year lows. Multifamily permits still declined both monthly and annually, though, suggesting the construction rebound in that segment may not hold in the near term.
California’s housing market gained real ground in June. Closed escrow sales of existing single-family detached homes reached a seasonally adjusted annualized rate of 279,880, up 4.1 percent from May and 6.0 percent from a year earlier, the strongest annual gain since September 2025. All five major regions posted year-over-year increases, led by the Far North’s 23.3 percent jump, followed by the Central Valley at 13.8 percent, Southern California at 10.8 percent, and the San Francisco Bay Area at 7.8 percent. Sales for the first half of 2026 were up 1.9 percent over the same period last year, suggesting housing demand may be broadening beyond the higher-priced segments that drove the market earlier in the year.
California Association of Realtors (C.A.R.) Senior Vice President and Chief Economist Jordan Levine framed June’s rebound as buyers adjusting to reality rather than rates coming down. “June’s rebound in housing demand helped the market close the second quarter on firmer footing, with the broad-based increase in sales suggesting that some buyers are beginning to adapt to the current interest rate environment,” Levine said. He was also direct about what could derail that progress. “However, the recent escalation of conflict in the Middle East has added renewed upward pressure on mortgage rates, which could weigh on affordability and create additional headwinds for housing demand as the summer buying season unfolds,” Levine said.
C.A.R. President Tamara Suminski, a Southern California broker, struck a similarly measured tone. “California’s housing market ended the first half of the year on stronger footing, with home sales reaching their highest level in six months despite elevated mortgage rates and ongoing affordability challenges,” Suminski said, adding that improving inventory and consumer confidence could support demand through the rest of 2026.
California’s median home price eased 2.8 percent in June from May’s record, settling at $904,640, but it has now held above $900,000 for three straight months. The 0.4 percent annual increase was modest by recent standards, reflecting both a more balanced mix of homes sold and a pullback in million-dollar sales from May’s record share.
Active listings fell 10.4 percent from a year earlier, the fifth consecutive annual decline, as the lock-in effect keeps many homeowners with low existing mortgage rates out of the market. That scarcity is likely to persist through the rest of the summer. Prices typically soften seasonally in the second half of the year, and this year should be no exception, but the ongoing supply shortage should help limit how far prices fall if mortgage rates stay elevated.
Taken together, the data point to an economy and a housing market moving sideways more than in any clear direction, waiting on developments overseas as much as anything happening domestically. The next several weeks of oil prices and geopolitical news may end up mattering more to California home buyers than anything the Fed does at its next meeting.
