Inflation Cools in February as Falling Gas and Airfare Prices Offset Rising Housing Costs

Annual inflation slowed last month, in a welcome development for homebuyers that could bring some relief to mortgage rates.

Overall prices rose 2.8% in February from a year earlier, a slowdown from the 3% increase recorded in January, according to the Labor Department’s consumer price index data released on Wednesday.

On a monthly basis, prices rose 0.2%, which was slower than the 0.3% consensus expectation from economists.

Stocks reacted positively to the news, with futures for all three major indexes rising in the pre-market after several days of heavy selling driven by concerns over the Trump administration’s trade policies.

Rising housing costs accounted for nearly half of the overall monthly inflation figure, but falling gasoline and airfare prices partly offset this.

On an annual basis, shelter costs were up 4.2% and remained a major driver of overall inflation. A recent report from Realtor.com® showed that the housing supply gap of 3.8 million homes is an important contributor to higher housing costs.

“With recession worries rising, attention will be focused on this inflation reading, and today’s data offer a nice counterpoint to last month’s higher-than expected figures,” says Realtor.com Chief Economist Danielle Hale.

The Federal Reserve will meet next week to issue its next rate policy decision, after pausing rate cuts at its last meeting in January over concerns that inflation is not cooling as quickly as expected.

Financial markets are predicting that the Fed will again leave rates unchanged at their current range of 4.25% to 4.5%, despite the latest inflation reading coming in cooler than expected.

At a forum last Friday, Fed Chair Jerome Powell underscored that it takes several consistent inflation readings to signal a shift.

Policymakers “do not overreact to one or two readings that are higher or lower than anticipated,” he said.

Fed pause leaves housing market in limbo as spring arrives

Although the latest inflation data should benefit mortgage rates to some degree, rates remain unlikely to fall significantly anytime soon.

Mortgage rates have remained uncomfortably high since last fall, with 30-year fixed rates averaging 6.63% last week, according to Freddie Mac. Most economists expect rates to remain well above 6% through 2025, though the onset of a recession could drive them down quickly.

“With no Fed rate cut until at least the summer, the mortgage market has been reacting to economic data on the broader economy,” says Bright MLS Chief Economist Lisa Sturtevant.

President Donald Trump‘s trade policy, including his constantly shifting proclamations on tariffs, has introduced a wild card of uncertainty to the economy that sent the Nasdaq composite into correction territory this week.

“It is widely believed that the Trump administration’s tariffs will raise prices, putting upward pressure on inflation and keeping rates elevated,” says Sturtevant. “However, at the same time, there are growing concerns that the economy is slowing. If the economy does cool, mortgage rates could fall.”

Growing fears of a recession have also damaged consumer confidence, which in February experienced its biggest monthly decline in nearly four years, according to the Conference Board.

Altogether, it makes predictions difficult for the spring season, which is the most popular time of year to buy and sell homes.

“Although mortgage rates are a critical piece of the housing market puzzle, consumer confidence might be an even more important metric to watch,” says Sturtevant. “People are less likely to make big decisions, like buying or selling a home, when they feel uncertain about their financial situations.”