December’s Inflation Report Unlikely to Impact Mortgage Rates

By Published On: January 11th, 20242.5 min read
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June 2024

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Consumer prices rose slightly more than expected to close 2023, but the news shouldn’t move mortgage rates much or impact the overall housing market. 

The December CPI report is unlikely to have much of an impact on financial markets or mortgage rates. Consumer prices rose slightly more than expected in December, but not enough to change expectations that the Fed will cut interest rates several times in 2024. And there’s plenty of time for additional economic datasets to come in before the Fed’s March 20 meeting. That will be the first Fed meeting of the year for which the outcome remains uncertain;  the next Fed meeting is in January, but markets are almost certain they’ll hold interest rates steady then.  

Overall inflation came in slightly hot, but core CPI was mostly in line with expectations. Overall inflation increased more than expected in December, and by more than it did in November: Consumer prices rose 0.3% month over month and 3.4% year over year, compared with increases of 0.1% and 3.1%, respectively, in November. But because the volatility of gas prices makes overall CPI a poor measure of underlying inflation, we focus more on core CPI, which strips away fuel and food prices. December’s core CPI came in at 0.3% month over month and 3.9% year over year, similar to November’s readings and in line with expectations. 

Shelter inflation is likely to fall in the coming months, bringing core CPI down. These numbers are a little disappointing after the rapid deceleration of core CPI in late 2023. The main barrier to CPI falling more quickly toward the Fed’s 2% goal is shelter, which accounted for more than half of December’s total increase in inflation. Shelter inflation rose 0.5% from the month before, faster than expected. However, rent prices for new leases consistently came in flat or fell during the end of 2023, suggesting there’s much more room for shelter inflation to come down. That means inflation is very likely to continue declining this year, even if we hit some bumps. 

Financial markets are laser-focused on the Fed’s March 20 meeting–and this inflation report will be in the rearview mirror by then. Investors are pricing in an interest-rate cut at that meeting, even though Fed officials have expressed skepticism that they’ll actually cut rates at that meeting. The December inflation report makes the Fed a little less likely to cut in March–but not much. The Fed will have time to digest two more inflation reports and several other economic datasets by then. 

This inflation report shouldn’t impact homebuyers or sellers. Yields on 10-year treasuries rose a few basis points when this morning’s inflation news came out, but they’ve almost fully retreated. Mortgage rates typically follow 10-year treasury yields. Overall, today’s news is unlikely to impact mortgage rates or the housing-market outlook, and shouldn’t change the picture for homebuyers or sellers. 


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