Inflation increased to 3.4% in December – Here's what that means for mortgage rates
Mortgage rates could increase after December CPI reading
Grocery prices increased in December, contributing to the overall rise in inflation. (iStock)
Consumer prices increased more than expected in December, driven by a continued uptick in shelter prices, according to the Consumer Price Index (CPI) released by the Bureau of Labor Statistics (BLS).
On an annual basis, prices rose 3.4% in December, up from 3.1% growth last month and above economists' expectations. Core inflation, which excludes more volatile food and energy prices, increased by the same 0.3% it did in November. On an annual basis, Core CPI slowed less than expected to 3.9%.
Shelter costs continued to weigh heavily on inflation, contributing to over half of the monthly increase. A rise in gas, electricity and food prices also added to what consumers spent in December. Gas prices were up 0.2% after having dropped 6% in November. Grocery prices rose 0.1% over the month, and food prices away from home rose 0.3%.
The report followed news last Friday that the economy added 216,000 jobs in November, with annual wage growth increasing.
The numbers have drawn some concern that it could delay the timeline for the Federal Reserve to begin dialing back interest rates. During its December meeting, the central bank announced a third interest rate pause, leaving the federal funds rate at a 22-year high of 5.25% to 5.5%. However, Fed officials hinted that they could begin rate cuts this year, with interest rates expected to drop to 4.6%, according to updated economic forecasts in the central bank's Summary of Economic Projections (SEP).
"The monthly increases in prices for food, housing, and core services rose at similar rates to those registered in November, while energy and core goods prices – which had previously been contributing downward pressure on topline inflation – stayed relatively flat," Kayla Bruun, a senior economist at decision intelligence company Morning Consult, said in a statement. "Morning Consult's data showed consumer demand strengthened for various goods in late 2023, potentially lending price support to these categories.
"With much of the inflation slowdown thus far tied to goods, a reversal in the downward trend could pose another obstacle to the Fed in its pursuit of its 2% inflation goal," Bruun continued.
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Mortgage rates may have dropped too soon
Market expectations were that the Fed would begin cutting rates as early as its March meeting. While the stronger-than-anticipated economic figures don't take rate reduction off the table, it's likely to push them further into the future, according to Realtor.com Chief Economist Danielle Hale.
"For the housing market, this means that the significant decline in mortgage rates observed since October may have gotten ahead of the data," Hale said in a statement.
Mortgage rates have already steadied since their steady decline between late October and mid-December. According to Hale, a more meaningful drop in rates will depend on how soon the Fed reverses course on interest rates, and today's CPI reading could push rates up again.
Shelter costs are expected to keep dropping and could help further moderate inflation in the coming months, but they would need to fall to roughly 3.5% for inflation to come in consistently on target.
"With market asking rents notching a seventh month of decline and additional weakness forecast for the rental market in 2024 as much needed supply is completed and becomes available, I expect further slowing of shelter inflation and thus the overall rate of price gains in the months ahead," Hale said.
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Americans feel more confident about their finances
Americans are feeling more confident about their finances, according to WalletHub's most recent Economic Index. The index, which measures consumers' confidence about their financial outlook, increased by 15% between December 2022 and December 2023. Consumers' six-month outlook on their finances reached the highest level of optimism recorded since December 2020, the survey said.
The share of consumers who expected to have less debt after the next six months increased by 4.4% in December 2023 compared to last year, the survey said. In addition, consumers' confidence in reducing their debt over the next six months has hit the highest level recorded since December 2020.
"The 15% increase in consumer sentiment over the past year is an encouraging sign that our economy is recovering from the damage it suffered as a result of the pandemic and inflation," WalletHub Analyst Cassandra Happe said. "People who have high financial confidence are likely to spend more money and reduce their debts, both of which are good for the economy as a whole."
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