Inflation Holds Steady at 2.7% as Fed Prepares To Pause Rate Cuts

Inflation didn't get worse last month, but it also didn't improve, potentially bolstering the case for the Federal Reserve to hold interest rates steady when policymakers vote later this month.

Overall prices as measured by the Consumer Price Index (CPI) rose 2.7% in the 12 months through December, matching economist expectations and unchanged from the November rate, the Labor Department reported Tuesday.

So-called core inflation, excluding volatile food and energy prices, was at 2.6% annually, also matching the prior month's reading.

The sticky inflation reading, seemingly stuck a bit above the Fed's 2% target, may not show enough improvement to sway Fed policymakers to vote for another rate cut when they next meet Jan. 28, says Realtor.com® Senior Economist Jake Krimmel.

"For the Fed, this report is unlikely to change the near-term outlook," says Krimmel. "Inflation is not meaningfully improving, but the low-hire, low-fire labor market is also not deteriorating sharply either."

Financial markets estimate roughly a 95% probability that the Fed holds rates steady at its next meeting, according to CME FedWatch.

That's up from about 83% last week, perhaps in response to Fed Chair Jerome Powell's stern retort to the new threat of criminal prosecution from President Donald Trump's Department of Justice.

In an extraordinary statement, Powell dismissed the criminal probe as an intimidation tactic to force lower interest rates, and vowed that the central bank would continue to set rate policy "without political fear or favor."

The Fed uses higher interest rates to fight inflation and lower rates to boost the job market. The Fed does not directly control mortgage rates, although the central bank's policy can influence those long-term rates.

"For housing and consumers, inflation matters through two channels. First, inflation can erode real wage gains," says Krimmel. "Continued price moderation would directly improve purchasing power for homebuyers as we head toward the spring 2026 market. Second, inflation expectations and monetary policy shape mortgage rates."

Food and housing costs continue to rise

The new inflation report showed that food costs continued to rise, with overall grocery prices up 2.4% annually and restaurant meals rising 4.1%.

Notable increases were seen in the prices of beef (+16%), coffee (+20%), and candy (+10%), while the price of eggs dropped 20% from a year ago, when a bird flu wiped out millions of laying hens.

Housing costs as measured in the CPI also continued to rise, with rent up 3.1% annually and owner's equivalent rent, a measure of how much homeowners estimate it would cost to rent their primary residences, up 3.4%.

Those increases came despite a national softening in rents as measured by Realtor.com, with the CPI data significantly delayed due to the Labor Department's survey method.

Meanwhile, cheaper gasoline helped keep headline inflation under control, with gas prices down 3.4% in December compared to a year earlier.