Inflation Surges Back Up to 3% in Troubling Sign for Consumers and Mortgage Rates

Annual inflation has risen for the fourth straight month, news that will quickly send mortgage rates higher for prospective homebuyers.

Overall prices were up 3% in January from a year earlier, higher than the 2.9% pace recorded in December, according to the Labor Department’s consumer price index (CPI) data released on Wednesday.

So-called core inflation, excluding volatile food and energy prices, jumped 3.3% on the year, with prices rising in categories including car insurance, used cars and trucks, medical care, and airline fares.

The hotter-than-expected inflation data quickly sent yields on 10-year Treasury notes surging by up to 10 basis points. Mortgage rates tend to follow long-term bond yields.

Rates for 30-year fixed home loans averaged 6.89% last week, according to Freddie Mac, and have hovered near 7% since the beginning of the year.

The Federal Reserve paused cuts to short-term interest rates at its latest meeting last month. The latest inflation data, combined with recent jobs numbers that showed the labor market still humming strongly, will likely discourage the central bank from resuming rate cuts anytime soon.

The Fed aims for a 2% annual inflation rate, and it uses higher interest rates to crack down when inflation runs hotter than its target.

The troubling new inflation report comes after President Donald Trump took office late last month with a vow to lower prices for consumers, and will add pressure on the Republican to deliver on his promise.

Notably, the January uptick in inflation precedes any of the major new tariffs that Trump has promised to impose. Most economists view tariffs—a tax on U.S. companies that import goods from other countries—as inflationary and likely to drive up the cost of certain products.

Housing costs remain a major inflation driver

Rising costs for housing continued to be a major driver of overall inflation last month. The shelter index, which accounts for more than a third of overall CPI, rose 4.4% in January from a year earlier.

Still, it was the lowest annual figure for shelter inflation in three years, following a steady decline in shelter inflation since the figure peaked at more than 8% in early 2023.

“The stickiest part of the inflation measure has been the housing component,” says Bright MLS Chief Economist Lisa Sturtevant. “In January, housing accounted for nearly 30% of the overall monthly rise in prices. However, there are signs that slower home price growth and lower rents are starting to show up in the inflation measures.”

Changes in housing costs can take up to six months or longer to show up in the monthly CPI data, due to how the Labor Department measures rent and estimates costs for homeowners.

“It will be very hard for the headline inflation number to reach the Fed’s 2% goal without a slowdown in housing costs,” says Sturtevant. “More housing supply—both rental and for-sale housing—is the key to easing housing costs and bringing the overall rate of inflation down.”