Gas prices had the biggest impact on inflation in December. (Stock)
Annual inflation rose to 2.9% in December, up slightly from last month’s 2.7% annual inflation rate, according to the Consumer Price Index (CPI) released by the Bureau of Labor Statistics (BLS).
Inflation rose 0.4% monthly in December, slightly beating expectations. Core CPI, which excludes food and energy, rose 0.2% in December, coming in below estimates after four consecutive months of 0.3% increases. This brought the annual rate to 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. Gas increased by 4.4% in the month. Food prices continued to rise, rising 0.3% last month after a 0.4% surge in November.
“The CPI report for December brings a mix of news, including a glimmer of hope,” U.S. Chief Economist Sam Williamson said in a statement. “While the Headline CPI grew and exceeded expectations, the monthly increase in the more volatile and widely watched Core CPI fell short and came in below expectations.
“This negative surprise in Core CPI is encouraging, but one month doesn’t make a trend,” Williamson continued. “The Federal Reserve will likely need to see continued progress before considering any rate cuts.”
The Federal Reserve cut interest rates by a quarter of a percentage point in December, dropping the rate from 4.25% to 4.5%, but the minutes of the Federal Open Market Committee meeting showed that there is growing concern about inflation and a clear divide between Members of the The Fed is about to continue dialing rates back. Some expressed support for keeping the central bank’s key rate unchanged, while most officials said the decision to cut rates was a close call, the minutes said. The Fed’s next meeting will be held on Jan. 28 and 29.
“The CPI numbers for December indicate that inflation is not cooling to a level that satisfies the Fed’s objective,” said Voxtur Analytics CEO Ryan Marshall. “As a result, those who had hoped the Fed would cut interest rates further in 2025 are now revising their forecasts to expect rate cuts this year.”
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Shelter costs remain high
Housing costs rose 0.3% monthly, the same pace as last month, which helped lower the annual rate of inflation to 4.6% from 4.7% last month, according to Realtor.com Chief Economist Danielle Hale.
Despite little progress, shelter costs remain above pre-pandemic levels, averaging 3.3%, according to Hale. Higher costs are likely to stop further rate cuts, affecting long-term rates such as mortgage rates, which remain below 7%.
“At this time, the market is not placing high chances before June,” Hale said in a statement. “The labor market ended 2024 at a faster pace, as employment increased and the unemployment rate fell to 4.1% in December. As the full employment portion of the Fed’s two-term mandate is more focused than it seemed to be three to six months ago. , the Fed is likely to will be patient, especially if inflation continues to rise above target.”
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The housing outlook is shaky
High mortgage rates will freeze the housing market despite willing buyers, according to Hale. Home ownership remains a top goal for nearly 75% of Americans surveyed by Realtor.com, but affordability remains a top concern for many.
“Existing home sales have improved in recent months following the decline in mortgage rates, but as prices rise, our expectations for home sales have weakened,” Hale said.
The future of housing remains the same in terms of housing costs, and housing prices are expected to continue to rise. Another highlight is that the incoming President Donald Trump’s administration could promote greater economic growth, and therefore, higher incomes, giving Americans more purchasing power. In addition, lower property tax rates are expected to increase household disposable income even if incomes do not increase, according to the Realtor.com Housing Forecast.
“By 2025, the Realtor.com Housing Forecast expects a slight decrease in mortgage rates to improve home sales,” Hale said. “Any reduction in the inflation rate will help bring those expectations closer to reality.”
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