Inflation Ticks Up to 2.7% but Fed Still Expected To Continue Rate Cuts

Annual inflation in the U.S. ticked up again last month, but the Federal Reserve is still widely expected to push forward with rate cuts as it meets again next week.

Overall prices rose 2.7% in November from a year ago, more than the 2.6% annual gain recorded in October and the second straight month of hotter inflation, according to the Labor Department’s consumer price index released on Wednesday.

Housing costs, which continue to power a large share of overall inflation, rose 4.7% over the last year—the smallest 12-month increase since February 2022. Other sectors with significant increases over the last year include car insurance (12.7%), medical care (3.1%), education (4.2%), and recreation (1.5%).

Despite the worrying uptick in overall inflation, markets still expect the Fed to cut its benchmark interest rate by a quarter percentage point when it meets on Dec. 17-18. Bond markets priced a 99.9% chance of the rate cut following the new inflation data, according to the CME Group’s FedWatch tool.

“Given the current position of monetary policy, I expect another quarter point rate cut decision in next week’s meeting; but today’s elevated inflation data put more emphasis on the path forward and suggest fewer rate cuts are likely ahead,” says Realtor.com chief economist Danielle Hale.

“The more interesting news out of next week’s Fed meeting will be how much the Fed’s inflation and policy rate expectations for 2025 have shifted as a result of recent readings.”

Indications about the Fed’s intent for 2025 could have major implications for mortgage rates, which follow trends in the long term bond market. The average rate on 30-year fixed mortgages stood at 6.69% last week following two straight weeks of decline, according to Freddie Mac.

Housing inflation still high, but slowing

Rising housing costs remain a major driver of overall inflation but showed continued signs of slowing growth in the November data.

The index measures shelter costs for homeowners through owners’ equivalent rent, or the estimated cost to rent the same residence at market rates.

Last month, the index for owners’ equivalent rent rose 0.2% from October, as did the index for standard rent—the smallest one-month increases since April 2021 and July 2021, respectively.

Overall, the November data reflected the continued downward trend in housing inflation, which is also reflected in market data showing stagnant rents and slowing growth in home prices.

Still, the outlook for 2025 remains uncertain, depending on whether President-elect Donald Trump‘s policies reignite inflation, as some experts forecast. But if inflation cools, allowing the Fed to continue cutting rates, the picture for prospective homebuyers grows more optimistic.

“Recent research from the U.S. Census Bureau has shown that moderate-income families are experiencing the strain of inflation much more than higher-income households,” says Bright MLS chief economist Lisa Sturtevant.

“This dichotomy in inflation stress will contribute to a tale of two housing markets in 2025. Higher-income individuals and families will be more active in the market. Existing homeowners who have accumulated significant housing equity will be in a good position to make a move-up purchase. But moderate-income individuals and families who want to purchase a home in 2025 are facing tighter budgets, more financial stress, and will find the housing market much more challenging,” she adds.

The Realtor.com® 2025 housing forecast projects market mortgage rates will decrease to 6.2% by the end of 2025, helping to offset a projected 3.7% gain in home prices over the course of the year and keeping overall monthly payments roughly flat for new mortgages.

“Steady monthly payments and income gains from a still robust economy and healthy labor market will help affordability improve marginally in the year ahead,” says Hale.