After months of promising signs in the fight against inflation, new data confirms that the fight is far from over. Inflation rose 2.9% On an annual basis in December, it was slightly higher than economists' forecast of 2.8%. The modest but unexpected rise follows a rise in inflation in November, when the climbed to 2.7%up 0.3% month-on-month. It also highlights the ongoing challenge the Fed faces in balancing economic growth while returning inflation to its 2% target.

While the increase is modest, it is a reminder that the path to economic stability is neither linear nor guaranteed. The recent rise in inflation may also lead to Impact on borrowing costsas this could help push the Fed's stance on cutting interest rates in 2025. After all, persistent inflation concerns throughout much of 2024 resulted in the Fed cutting interest rates just three times, cutting the benchmark rate by a total of 1 percentage point.

But what exactly does this new inflation report mean for borrowing rates, and for borrowing rates? Mortgage rates, especially? Below, we analyze in detail how this new data will affect home buyers and homeowners seeking to refinance.

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What the new inflation report means for mortgage rates

mortgage interest rate The past few months have been volatile, with an overall upward trend in recent weeks. As of January 15, 2025, the average interest rate on a 30-year fixed-rate mortgage was 7.01%, up slightly from rates earlier this year and at the end of 2024.

The recent increase in mortgage rates has related to inflation dynamics. When inflation accelerates, lenders will often raise interest rates to ensure their returns exceed inflation and thus maintain the purchasing power of repayments. That's exactly what happened in December after inflation data showed a slight rise in November. After the inflation report was released, mortgage rates It began to recover, climbing from an average of 6.75% in mid-December to more than 7% at the end of the month. This new inflation data could push mortgage rates down to similar levels as lenders adjust rates to mitigate potential declines in future values.

Lenders’ decisions are not unique What drives mortgage ratesalthough. The Fed’s monetary policy also Significantly affects mortgage rates. While the Fed does not directly set consumer borrowing rates, its interest rate decisions affect the broader interest rate environment, and the Fed had signaled before the latest inflation data that it would take a more cautious approach to interest rate cuts this year. A new rise in inflation could make central banks more cautious about cutting interest rates, which could lead to mortgage rates remaining high or rising further over time.

The market's reaction to the latest inflation data could also have an impact on where mortgage rates go. If investors expect the Fed to keep interest rates higher for an extended period due to inflation concerns, then government bonds such as 10-Year Treasury Billmay increase. Since these yields are the benchmark for mortgage rates, rising interest rates could prompt lenders to raise rates to maintain profit margins.

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While it's impossible to predict exactly where mortgage rates will go next, the latest inflation data could help keep rates rising, and if inflation remains stubborn, rates could rise further. So while the housing market has shown resilience in adapting to rising interest rates, potential homebuyers and those seeking to refinance may need to adjust their expectations and strategies accordingly. After all, the combination of persistent inflation and a cautious Fed suggests that the era of ultra-low mortgage rates remains firmly in the rearview mirror, at least for the foreseeable future.