According to the Consumer Price Index (CPI) data released by the Bureau of Labor Statistics (BLS), annual inflation saw a slight uptick to 2.9% in December, compared to the previous month’s rate of 2.7%.
In December, inflation grew by 0.4% month-on-month, surpassing initial expectations. The Core CPI, which excludes volatile food and energy prices, edged up by 0.2%, falling short of estimates after a stretch of four consecutive months at 0.3%. This brought the annual Core CPI rate to 3.2%.
A notable driver of the monthly inflation increase was the energy cost, which soared by 2.6%, contributing nearly 40% to the overall rise in item prices for December. Additionally, gas prices increased by 4.4% from the previous month. Food prices also continued their upward trend, rising by 0.3% last month following a 0.4% increase in November.
“The December CPI report presents a mixed bag of results, offering some hope,” remarked Sam Williamson, Senior Economist at First American. “While the Headline CPI has increased and exceeded forecasts, the core inflation figure, which is often more closely monitored, moderated and was lower than anticipated.”
Williamson added, “This unexpected dip in the Core CPI is a positive sign, though one month’s data alone does not establish a trend. The Federal Reserve will likely want to see consistent progress before contemplating any reductions in interest rates.”
The Federal Reserve implemented a quarter-point interest rate cut in December, lowering rates from 4.25% to 4.5%. However, minutes from the recent Federal Open Market Committee meeting revealed rising concerns about inflation and divided opinions among Fed members regarding the potential for further rate cuts. Some members indicated a preference for maintaining the current rate, with most officials deeming the decision to lower rates a close call. The Fed’s upcoming meeting is scheduled for January 28 and 29.
Ryan Marshall, CEO of Voxtur Analytics, commented, “The December CPI figures suggest that inflation is not decreasing at a pace that meets the Fed’s target. Consequently, those who were hopeful for more substantial interest rate reductions by the Fed in 2025 are adjusting their forecasts to predict fewer cuts this year.”
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Shelter Costs Remain Elevated
According to Danielle Hale, Chief Economist at Realtor.com, shelter costs rose by 0.3% in December, maintaining the same pace as the previous month but contributing to a reduction in the annual inflation rate from 4.7% to 4.6%.
Despite this modest decline, shelter costs remain significantly higher than pre-pandemic averages, which hover around 3.3%. Persistently high shelter expenses may hinder the likelihood of further interest rate cuts, influencing long-term rates like those for mortgages, which remain just below 7%.
“Currently, the market does not expect a rate cut before June,” Hale noted. “The labor market ended 2024 strongly, with increased hiring and a dip in the unemployment rate to 4.1% in December. Given that the labor market is more stable than it appeared three to six months ago, the Fed may choose to adopt a patient stance, especially if inflation continues to remain slightly above target levels.”
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The Housing Outlook is Uncertain
According to Hale, elevated mortgage rates are expected to further stagnate the housing market, despite the presence of eager buyers. Homeownership remains a priority for approximately 75% of respondents surveyed by Realtor.com; however, many are concerned about affordability.
“Existing home sales have seen improvements in recent months after a drop in mortgage rates, but as these rates rise again, our expectations for home sales have diminished,” Hale explained.
Looking ahead, the housing market is likely to experience continued high mortgage rates, with home prices projected to keep increasing. However, the incoming administration of President Donald Trump might trigger more robust economic growth and, consequently, higher incomes, enhancing buying power for Americans. Additionally, anticipated reductions in household tax rates may increase disposable income even without a rise in salaries, according to the Realtor.com Housing Forecast.
“For 2025, the Realtor.com Housing Forecast predicts a slight decrease in mortgage rates, which could facilitate a modest rise in home sales,” Hale stated. “Any decline in the inflation rate will help bring that expectation closer to reality.”
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