Inflation wasn’t worse last month, but it didn’t improve either, which could strengthen the case for the Federal Reserve to hold interest rates when policymakers vote later this month.
Overall prices as measured by the Consumer Price Index (CPI) rose 2.7% in the 12 months to December, in line with economists’ expectations and unchanged from the November estimate, the Labor Department reported on Tuesday.
So-called core inflation, excluding volatile food and energy prices, was 2.6% year-on-year, also similar to last month’s reading.
The sticky inflation reading, which appears to be standing slightly above the Fed’s 2% target, may not show enough improvement to prompt Fed policymakers to vote for a rate cut when they next meet on Jan. 28, says Senior Economist for Realtor.com®. Jake Krimmel.
“For the Fed, this report is unlikely to change the near-term outlook,” Krimmel said. “Inflation isn’t improving in a meaningful way, but the low-wage, low-cost labor market isn’t deteriorating much either.”
Financial markets are estimating about a 95% chance that the Fed will keep rates unchanged at its next meeting, according to CME FedWatch.
That rose to about 83% last week, perhaps in response to the Fed Chairman Jerome PowellA strong response to the new threat of criminal prosecution from the President Donald TrumpDepartment of Justice.
In a rare statement, Powell dismissed the criminal investigation as a scare tactic to force low interest rates, and vowed that the central bank would continue to set rate policy “without fear or political favor.”
The Fed uses high interest rates to fight inflation and low rates to stimulate the labor market. The Fed does not directly control mortgage rates, although central bank policy can affect those rates over the long term.
“For households and consumers, inflation is important in two ways. First, inflation can erode real wage gains,” Krimmel said. “Continued price moderation will directly improve the purchasing power of home buyers as we look to the spring market of 2026. Second, inflation expectations and monetary policy are shaping mortgage rates.”
Food and housing costs continue to rise
The latest inflation report showed that food costs continued to rise, with overall grocery prices up 2.4% year-on-year and restaurant meals up 4.1%.
Significant increases were seen in the prices of beef (+16%), coffee (+20%), and sweets (+10%), while the price of eggs fell by 20% from last year, when bird flu killed millions of laying hens.
Housing costs as measured in the CPI also continued to rise, with rents up 3.1% year-on-year and owner-occupied rents, a measure of how much homeowners estimate it will cost to rent their primary residences, up 3.4%.
That increase came despite softening national rents as measured by Realtor.com, with CPI data significantly delayed due to the Labor Department’s testing methodology.
Meanwhile, cheap fuel helped keep inflation under control, as gas prices fell 3.4% in December compared to a year ago.
