December’s Inflation Report Means Rates Higher for Longer | Nestfully

December’s Inflation Report Means Rates Higher for Longer

Lisa Sturtevant, PhD 
Chief Economist, Bright MLS 


According to the Bureau of Labor Statistics report on the Consumer Price Index (CPI), inflation was at 3.4% in December, the highest level since September and a jump from November’s 3.1% reading. The December inflation report provides a stark reminder that getting inflation down those last couple of percentage points is not going to be easy. 

There was strong consumer spending over the holidays, which propped up prices in some segments of the economy. However, housing continues to play an outsized role in keeping inflation above the Fed’s target. Shelter inflation has come down over the past few months, but in December, the shelter index was still up 6.2% year-over-year and accounted for two-thirds of the total increase in the price index that excludes food and energy. 

Inflation is one of the key economic metrics that the Federal Reserve is watching as they plan for interest rate cuts in 2024. Core inflation, which excludes food and energy costs, is the particular inflation measure the Fed watches. The Fed’s target is for core inflation to be at 2%. In December, the core CPI measure was 3.9%. 

 

 

 

 

Predictions had been for the Fed to begin cutting rates in March. However, with the strong December jobs report and inflation where it is, it is becoming more likely that those rate cuts will come later in the year. So far, consumers and businesses have been largely undeterred by the higher rate environment. If rates remain higher for longer, the picture could change.  

For homebuyers and sellers, what the Fed does may be less important than what is going on in the broader economy. Mortgage rates fell at the end of 2023, prompting renewed interest from homebuyers. Mortgage rates are expected to continue to fall in 2024. Assuming the labor market remains strong, we expect a lot of demand in the market. Lower rates may also entice some sellers to enter the market, but it is still going to be a competitive homebuying landscape in 2024, with prices rising or holding steady in most markets.