What the new inflation report means for mortgage rates
After several months of hopeful signs in the battle against inflation, new data confirms that the fight is far from over. Inflation rose 2.9% on an annual basis in December, which was slightly above the 2.8% rate that was forecasted by economists. This modest yet unexpected uptick comes on the heels of an uptick in inflation in November when the inflation rate climbed to 2.7%, up 0.3% from the month prior. It also highlights the Federal Reserve's ongoing challenges with bringing inflation back to its target of 2% while balancing economic growth.
While the rise isn't drastic, it's a reminder that the path to economic stability is neither linear nor guaranteed. This latest uptick in inflation is also likely to have an impact on borrowing costs, as it could help drive the Fed's stance on rate cuts in 2025. After all, the inflation issues that persisted throughout much of 2024 led to the Fed rolling out just three rate cuts, which slashed the benchmark rate by one percentage point in total.
But what exactly does this new inflation report mean for borrowing rates — and for mortgage rates, in particular? Below, we'll break down how this new data could impact homebuyers and homeowners looking to refinance.
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What the new inflation report means for mortgage rates
Mortgage rates have experienced fluctuations over the last few months, with a general upward trend in recent weeks. As of January 15, 2025, the average 30-year fixed-rate mortgage stands at 7.01%, reflecting a slight increase from earlier this year — and from the rates we saw in late 2024.
This recent rise in mortgage rates is closely linked to inflation dynamics. When inflation accelerates, lenders will typically raise interest rates to ensure their returns surpass inflation, preserving the purchasing power of their repayments. That's precisely what occurred in December after the November inflation data showed a slight uptick. After that inflation report was released, mortgage rates began to tick back up, climbing from an average of 6.75% in mid-December to over 7% by month's end. This new inflation data could push mortgage rates down a similar path as lenders adjust their rates to mitigate potential declines in future value.
Lender decisions aren't the only factor driving mortgage rates, though. The Federal Reserve's monetary policy also significantly influences mortgage rates. While the Fed doesn't directly set consumer borrowing rates, its decisions on interest rates impact the broader rate environment, and the Fed had already indicated that it would take a more cautious approach to rate reductions this year before the latest inflation data was released. This new uptick in inflation could make the central bank even more wary about rate cuts, which could contribute to mortgage rates remaining elevated or rising further over time.
Market reactions to the latest inflation data may also play a role in where mortgage rates head. If investors anticipate that the Fed will maintain higher rates for an extended period due to inflation concerns, yields on government securities, such as the 10-year Treasury note, may increase. Since these yields serve as benchmarks for mortgage rates, a rise can prompt lenders to adjust their rates upward to sustain profit margins.
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The bottom line
While it's impossible to predict with any certainty where mortgage rates will head next, the latest inflation data could help keep these rates elevated, with the possibility of further increases if inflation remains stubborn. So, while the housing market has shown resilience in adapting to the higher-rate landscape, prospective homebuyers and those looking to refinance may need to adjust their expectations and strategies accordingly. After all, the combination of persistent inflation and a cautious Federal Reserve suggests that the era of ultra-low mortgage rates remains firmly in the rearview mirror, at least for the foreseeable future.