December inflation overshadows the Fed’s expectations for interest rate cuts

The annual inflation rate rose to 2.9% in December, rising modestly above the annual inflation rate of 2.7%. From the previous monthAccording to the Consumer Price Index (CPI) Released by the Bureau of Labor Statistics (Plus).

Inflation rose 0.4% monthly in December, slightly beating expectations. The core CPI, which excludes food and energy, rose 0.2% in December, coming in below estimates after four straight months of 0.3% increases. Thus, the annual rate reaches 3.2%.

Energy costs rose 2.6% and were the largest contributor to the monthly increase in December, accounting for nearly 40% of the monthly increase across all items. The price of gas increased by 4.4% during the month. Food prices continued to rise, rising 0.3% last month after rising 0.4% in November.

“The December CPI report brings a mix of news, including a glimmer of optimism,” Sam Williamson, chief U.S. economist, said in a statement. “While the headline CPI rose and beat expectations, the monthly increase in the less volatile and more closely watched core CPI slowed and was below expectations.

“This downward surprise in core CPI is encouraging, but one month does not constitute a trend,” Williamson continued. “The Fed will likely need to see sustained progress before considering any rate cuts.”

The Federal Reserve cut interest rates by a quarter of a percentage point last December. Interest rates decreased from 4.25% to 4.5%but Minutes of the Federal Open Market Committee meeting The meeting showed that there is growing concern about rising inflation and a clear division among Fed members on whether to continue cutting interest rates. Some expressed support for keeping the central bank’s key interest rate unchanged, and most officials said the decision to cut interest rates was a close one, the minutes said. The next Fed meeting is scheduled for January 28-29.

“December CPI numbers suggest inflation is not cooling at a rate that meets the Fed’s target,” said Ryan Marshall, CEO of Voxtur Analytics. “As a result, those who were optimistic that the Fed would cut rates further in 2025 are now realigning their expectations to expect smaller rate cuts this year.”

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Shelter costs remain high

Shelter costs rose 0.3% monthly, at the same pace as the previous month, helping bring the annual inflation rate down to 4.6% from 4.7% last month, according to Realtor.com chief economist Danielle Hale.

Despite the slight progress, shelter costs are still above the pre-pandemic range, which averages 3.3%, according to Hill. Higher costs are likely to halt further interest rate cuts, affecting the level of long-term interest rates such as mortgage interest rates, which remain just below 7%.

“Currently, the market does not place significant odds on production cuts before June,” Hill said in a statement. “The labor market finished 2024 strong, with employment rising and the unemployment rate falling back to 4.1% in December. With the half-full employment of the Fed’s dual mandate putting the Fed on a firmer footing than it looked three to six months ago and is likely The Fed needs to be patient, especially if inflation continues to rise just above target.

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The housing outlook is fragile

According to Hill, higher mortgage rates will stall the housing market despite buyers’ desire. Homeownership remains a major goal for about 75% of Americans Surveyed by Realtor.comBut affordability remains a major concern for many.

“Existing home sales have improved in recent months after mortgage interest rates fell, but with interest rates rising again, our outlook for home sales has diminished,” Hill said.

What lies ahead for housing is more of the same in terms of mortgage rates, and home prices are expected to continue to rise. One bright spot is that the next president Donald Trump The US administration can work to stimulate more substantial economic growth, thus increasing incomes, giving Americans more purchasing power. Moreover, lower household tax rates are expected to boost household disposable income even if income does not rise, according to the ECB report. Realtor.com Housing Forecast.

“For 2025, Realtor.com housing forecasts expect a modest decline in mortgage rates to support a modest increase in home sales,” Hill said. “Every drop in inflation will help bring these expectations closer to reality.”

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