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Recent inflation data confirms that mortgage rates are likely to remain stable in the near term, with the Federal Reserve expected to proceed with a planned interest rate cut. The key takeaway for home buyers and homeowners is that while borrowing costs are not expected to spike, a dramatic drop in mortgage rates is also unlikely in the immediate future, as the latest Consumer Price Index (CPI) report aligns with economic forecasts.
What Did the November CPI Report Reveal About Inflation?
The core CPI, a critical measure of inflation that excludes volatile food and energy prices, increased by 0.3% in November from the previous month. This matches economist predictions and continues a trend observed over the past four months. The core CPI is now 3.3% higher than it was a year ago. This data is significant because the Federal Reserve uses it to gauge underlying inflation trends when setting monetary policy. The current trend indicates that the initial rapid decline in inflation, driven by falling goods prices, has slowed. Economists are now closely watching services inflation, which has not decreased as quickly as anticipated.
Why Is Shelter Inflation So Important for the Fed's Decision?
Shelter inflation, which includes costs for rent and homeowners' equivalent rent, remains a primary focus. In November, it increased by 0.3% month-over-month. While still elevated, this component is clearly decelerating. The more forward-looking, three-month annualized rate for shelter inflation has declined significantly to 3.8% in November from 8.3% two years ago. This is a positive signal because shelter costs are a backward-looking indicator, often reflecting rental market conditions from one to two years prior. The continued cooling of shelter inflation gives the Fed confidence that overall inflation is on a sustained path toward its 2% target, even if the journey is taking longer than initially hoped.
How Will the Federal Reserve's Actions Impact Mortgage Rates?
Based on the November data, the Federal Reserve is expected to follow through with a 25 basis point (bps) rate cut at its upcoming meeting. However, this move is already "priced in" by financial markets, meaning its effect on mortgage rates will be minimal. The more critical information will come from the Fed's updated economic projections for 2025. Previously, the Fed anticipated four rate cuts next year, but markets are now expecting only two, likely occurring in March and June. The major unpredictable factor for 2025 is fiscal policy, particularly the potential for broad-based tariff increases, which could reignite inflation and justify keeping interest rates higher for longer.
For anyone involved in the real estate market, the stability suggested by this data is a key planning tool. Prospective home buyers can proceed with confidence that mortgage rate volatility is currently low. Sellers should understand that while borrowing costs are stable, a significant surge in buyer demand from lower rates is not imminent. The most practical advice is to base your financial decisions on the current rate environment rather than betting on a substantial drop in the near future.
