Recent reports from the U.S. Bureau of Labor Statistics (BLS) found that the deceleration of inflation didn’t yield as 2022 came to a close. Overall inflation continued to slow in December, with the latest consumer price index (CPI) report showing prices grew by 6.5%—down from 7.1% the previous month—which is in line with analysts’ expectations.
Core inflation, which excludes volatile energy and food prices, climbed 5.7% in December from a year before, easing from a 6% gain in November.
Monthly, the CPI fell 0.1% in December due to falling energy prices, which dropped 4.5%. Core CPI rose 0.3% last month.
Significant drops in gas prices—down 9.4% last month—helped influence the energy price decline and were the most significant contributor to the monthly all-items decrease.
Since implementing its rate hike efforts nearly a year ago, the Fed has raised its interest rates to a range of 4.25% to 4.5% from near zero to combat elevated inflation. After several 75-basis point hikes, Fed officials pumped the brakes slightly in December by announcing its first 50-basis point hike since May 2022.
Still, there is a long way to go before inflation hits the 2% benchmark that the Fed has been aiming for, leaving experts wondering what the central bank will do in its February meeting.
Recent New York Times reports suggest that Fed officials are considering a smaller rate adjustment, with some, including Susan M. Collins, president of the Federal Reserve Bank of Boston, indicating they would support a 25-basis point hike if the data supported it.
December marks the sixth consecutive month of slowing inflation since peaking in June 2022. Moreover, pundits and onlookers think Thursday’s report suggests that the Federal Reserve’s aggressive approach to combat and tame inflation is having the desired effect.
“The surprisingly steady labor market, suggested by the recent strong employment report, is providing greater optimism that the Fed may achieve the desired soft landing,” said Dr. Lisa Sturtevant, Bright MLS chief economist, in a statement.
Sturtevant continued, “The positive inflation and employment data will not interrupt the Fed’s rate hike program, but it offers hope that the Fed could be closer to achieving its price stability goals and could slow rate increases. With the inflation rate falling for five consecutive months, the Fed may be able to pause rate increases by the middle of the year.”
Despite the positive overall inflation report, Sturtevant stressed that housing costs “continue to run hot” and will continue adding upward pressure on the overall price measure this year.
Increases in the cost of shelter played a significant role in the monthly increase for core inflation, according to the BLS. The shelter index rose 0.8% from November to December, while indexes for rent and the owners’ equivalent rent index also rose 0.8%.
Experts at the National Association of REALTORS® (NAR) believe that housing inflation due to rising rents could be in for a change this year.
“Private sector data in recent months have been pointing to near-zero rent growth in some major cities, and robust apartment construction will raise rental vacancy rates,” said NAR Chief Economist Lawrence Yun. “The 30-year mortgage rate dropping under 6% is now a distinct possibility. The gate is beginning to open for homebuyers who got shut out in October and November when the rates went above 7%. However, there is still a housing shortage and not enough listings.”
Amid the economic uncertainty, Sturtevant suggests that consumer sentiment will also play a significant role in the trajectory of the housing market this year.
“The latest inflation news should help buoy consumers’ spirits,” she said. “Overall consumer confidence rose in December, along with a boost in sentiment about the housing market. There is pent-up demand in the housing market, as many prospective buyers have been sitting on the sidelines over the past few months.
“With less pressure on the Federal Reserve, mortgage rates have likely hit their peak for the cycle and will now start to come down slowly,” Sturtevant explained. “Both buyers and sellers will begin to accept the ‘new normal’ of the 2023 housing market—which includes mortgage rates around 6%–and we should see more activity from both buyers and sellers as we head into the spring.”