The Consumer Price Index rose at an annual rate of 2.7 percent in December, leading many to believe the Fed will hold rates steady this month. But if market conditions cool in upcoming months, a March rate cut may be in the cards.
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Delayed data released by the Bureau of Labor Statistics on Tuesday leaves open the possibility of a Federal Reserve rate cut this spring.
The agency reported that the Consumer Price Index rose at an annual rate of 2.7 percent in December 2025, the same as the month prior, and about what analysts had expected. Consumer prices were up 0.3 percent month over month.
The report marked the first monthly inflation data released by the BLS since September. During the intervening months, reports were paused as a result of the government shutdown.
For the last 55 months, inflation has remained above the Fed’s 2 percent target. During the last few months of 2025, the Fed cut rates three times to combat the cooling labor market, with Fed Chair Jerome Powell arguing that market headwinds outweighed the risk of price pressures.
At 2.7 percent inflation, the Fed does not have much cause, at this point, to ease rates in any aggressive way. Therefore, the central bank is expected to hold rates steady during its Jan. 27-28 meeting.
However, if inflation accelerates in the coming months or if the labor market softens further, the Fed may consider a rate cut during its March meeting, which could also lead to a drop in mortgage rates.
Sam Williamson
“Inflation was little changed in December,” First American Senior Economist Sam Williamson said in a statement emailed to Inman. “While the report was slightly softer than markets expected, it doesn’t fundamentally change the near-term outlook ahead of the Federal Reserve’s late-January meeting, where interest rates are still widely expected to remain on hold.
“It does, however, keep March in play if upcoming inflation and labor market data continue to move in the right direction.”
Core inflation, which does not include food and energy prices, rose by 2.6 percent year over year, the BLS reported. Food prices rose 3.1 percent on an annual basis, up from 2.6 percent annually in November. The cost of shelter, which factors in the cost of rent or its equivalent for homeowners, plus lodging away from home and home or renters insurance, was up 3.2 percent year over year and up 0.4 percent on a monthly basis.
Service categories, including travel-related services (lodging, airfare), medical care and personal care, saw price increases while some goods categories, like used vehicles, saw prices soften.
Consumers looking to enter the market this spring will want to keep their eyes on upcoming price reports for hints about where rates may be headed — and how much it may help move the needle for them in terms of affordability.
“With the government shutdown still complicating month-to-month comparisons, policymakers are likely to put more weight on the next few reports to confirm the direction of inflation before changing course,” Williamson added.
“With the 2026 homebuying season just around the corner, the bigger takeaway for homebuyers from today’s report is what it could mean for mortgage rates heading into the spring. If upcoming inflation and labor market data continue to cool and keep a March rate cut in play, mortgage rates could drift modestly lower, offering incremental affordability relief and helping bring some rate-sensitive demand back.”
Email Lillian Dickerson
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