Inflation continues to rise after a seven-month decline from early in 2024, reversing the trend seen from March to September, and still falling well short of the target mark of 2% set by the Federal Reserve after seeing a 2.9% rise year-over-year.
The Consumer Price Index (CPI)—one of the main measures of inflation—rose for the third straight month in December, by 0.4% on a seasonally adjusted basis, an increase from the 0.3% rise in the index seen in November. This was also an increase on a year-over-year basis, with the 12 months ending in November clocking in at 2.7% inflation, per the index.
Essential items also took an inflationary hit, as the energy index rose by 2.6% for the month, which accounted for over 40% of all items included in the index. Food and gas also saw a rise in their indices, as the gasoline index increased by 4.4% from the previous month, and food both at home and away from home also rose by 0.3%. Year-over-year, the energy index posted a 0.5% decline for the preceding 12 months. The food index increased by 2.5% for the preceding 12 months.
Core inflation, listed as all items less food and energy in the index, also rose 0.2% in December, a moderation of increase for that measure as it had risen by 0.3% in each of the previous four months. Indices that contributed to this rise in core inflation were shelter, airline fares, used cars and trucks, new vehicles, motor vehicle insurance and medical care.
This data has sobering implications for the 2025 mortgage rate market. According to Bright MLS Chief Economist Lisa Sturtevant, “At its December meeting, the Federal Reserve released updated economic projections which suggested the central bank has heightened concerns about inflation risks in 2025. The Fed now has solid reasons to hold back on future rate cuts, with inflation now on the rise for three months in a row.”
The ever constant tension between inflation and interest rates may very well spill into the housing market to start 2025.
“Today’s news suggests that housing market activity could be slower than expected in the first part of the year. Higher inflation is going to mean mortgage rates remain elevated,” Sturtevant continued. “Rates reached a six-month high this past week, rising to close to 7%, according to data from Freddie Mac. The compounding effect of inflation is also stressing many households. Although the inflation rate was 2.9% in December, prices have risen by more than 20% over the past five years. Prospective homebuyers are facing these twin financial challenges, which means they will have to adjust their expectations. Some are going to sit out the market altogether.”
Although this paints a somewhat bleak picture to kick off the new year, National Association of REALTORS® Chief Economist Lawrence Yun offered a silver lining in his statement.
“(CPI) is expected to go down further because the heavyweight components of shelter costs are decelerating, as rents and home prices are no longer rising as strongly. The latest 4.5% rise in shelter costs appears high, but marks the slowest gain in three years. Various non-official private sector data are pointing toward no growth in apartment rent due to the vast oversupply of new empty units hitting the market. Moreover, with oil prices falling by about 30% from three years ago, more calming effects on inflation are embedded in the future inflation data. Mortgage rates will move slightly lower—perhaps to 6.5% just in time for the spring home-buying season.”
Realtor.com® Chief Economist Danielle Hale offered another tempering take on the seemingly difficult economic outlook, also pointing out that inflation is slowly beginning to moderate.
“One bright spot from today’s CPI data that will help was in core inflation—the index that excludes more volatile food and energy prices and is considered a good indicator of underlying price pressure,” Hale said. “Despite the uptick in overall prices, which was largely driven by a surge in energy prices that accounted for 40% of the monthly pickup, the core readings suggest slow progress toward the inflation target continues.”
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