Softer December CPI keeps rate reductions on hold for now, but could strengthen chances of a cut down the line
Core United States inflation eased slightly in December, offering the Federal Reserve more evidence that price pressures have continued to cool even as policymakers weigh when to end their rate‑cutting campaign and what that would mean for mortgage borrowers.
Excluding food and energy, the consumer price index rose 0.2% on the month and 2.6% year over year, both 0.1 percentage point below economists’ forecasts, according to the Bureau of Labor Statistics.
Headline CPI increased 0.3% on the month and 2.7% annually, matching consensus estimates. Inflation therefore remains above the Fed’s 2% target but stays well below its 2022 peak.
Shelter and food once again did much of the work. Shelter costs rose 0.4% in December and 3.2% over the year, while food prices climbed 0.7% on the month, with groceries still a key pain point for households.
Some pockets of the index showed rare relief, including used vehicles and communications services, which declined.
For markets looking to the Fed’s January 27‑28 meeting, the softer core reading strengthens hopes that the central bank might eventually resume cutting rates in 2026, even if a January move appears unlikely.
The Fed’s target range for the federal funds rate stands at 3.5% to 3.75% after three cuts late last year, with several policymakers signaling they are close to a neutral stance.
“Today’s inflation report doesn’t give the Fed what it needs to cut interest rates later this month,” said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management.
Wells Fargo economists similarly argued that the investigation into Fed chair Jerome Powell is unlikely to shift near‑term policy, but could complicate longer‑term consensus‑building at the central bank.
A lower‑than‑expected core CPI reading supports the case for additional easing later this year, which could gradually pull down borrowing costs if confirmed by further data. But with inflation still above target and Fed officials emphasizing persistence risks, most forecasters expect policy makers to keep the funds rate steady in January and reassess the path of cuts as new inflation and employment data arrive.
"While the report was slightly softer than markets expected, it doesn’t fundamentally change the near-term outlook ahead of the Federal Reserve’s late-January meeting, where interest rates are still widely expected to remain on hold,” First American senior economist Sam Williamson said.
“It does, however, keep March in play if upcoming inflation and labor market data continue to move in the right direction.”
With the 2026 home-buying season approaching, Williamson points to the rate path as the key takeaway for housing.
“If upcoming inflation and labor market data continue to cool and keep a March rate cut in play, mortgage rates could drift modestly lower, offering incremental affordability relief and helping bring some rate-sensitive demand back.”
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