With the consumer price index rising at an annual rate of 2.7% in December, many expect the Fed to keep interest rates unchanged this month. However, if market conditions cool down in the coming months, a March interest rate cut could be on the cards.
The delay in the numbers released by the Bureau of Labor Statistics on Tuesday leaves open the possibility that the Federal Reserve will cut interest rates this spring.
The agency reported that the consumer price index in December 2025 rose at an annual rate of 2.7%, the same as the previous month, almost in line with analysts’ expectations. Consumer prices rose 0.3% from the previous month.
The report marks the first monthly inflation statistics released by the BLS since September. In the preceding months, reporting was suspended as a result of the government shutdown.
Inflation has remained above the Fed’s 2% target for the past 55 months. The Fed cut interest rates three times in the final months of 2025 to combat a cooling labor market, with Fed Chairman Jerome Powell arguing that market headwinds outweighed the risks of price pressures.
With inflation at 2.7%, there isn’t much reason for the Fed to cut rates aggressively at this point. The central bank is therefore expected to keep interest rates unchanged at its January 27-28 meeting.
However, if inflation accelerates or the labor market weakens further in the coming months, the Fed could consider cutting interest rates at its March meeting, which could lead to lower mortgage rates.
Sam Williamson
“Inflation remained largely unchanged in December,” Sam Williamson, senior economist at First American, said in an emailed statement to Inman. “While this report was slightly softer than the market expected, it does not fundamentally change the near-term outlook ahead of the Federal Reserve’s meeting in late January, when interest rates are widely expected to remain unchanged.
“However, if future inflation and labor market data continue to trend in the right direction, the impact of March should be sustained.”
Core inflation, which does not include food and energy prices, rose 2.6% year over year, the BLS reported. Food prices rose at an annual rate of 3.1%, up from 2.6% in November. Shelter costs, which are homeowners’ rent or equivalent costs plus non-home accommodations and home or renter’s insurance, increased 3.2% year-over-year and 0.4% on a monthly basis.
Prices rose in service sectors such as travel-related services (accommodation, airfare), medical care, and personal care, but prices fell in some product sectors such as used cars.
Consumers looking to enter the market this spring will be able to keep an eye on upcoming pricing reports for hints about where interest rates are headed and how much that will change in terms of affordability.
“With month-on-month comparisons still complicated due to the government shutdown, policymakers are likely to place greater weight on the next few reports to confirm the direction of inflation before changing direction,” Williamson added.
“The 2026 home buying season is just around the corner, and the most important takeaway from today’s report for home buyers is what it means for mortgage rates as we head into the spring. If future inflation and labor market data remain cool and the March rate cut is sustained, mortgage rates could decline moderately, with gradual declines in mortgage rates and the gradual delivery of affordability relief that could help bring some of the rate-sensitive demand back.”
Email Lillian Dickerson
