CPI inflation reported today came in largely as expected. That increases the odds of a December Fed rate cut, but the determining factor will be the December 6 jobs report. Mortgage rates are likely to stay near 7% as inflationary and deficit concerns around higher tariffs and more extensive tax cuts keep long-term rates high.
Core CPI came in at 0.28% MoM (3.3% YoY) for October, just a touch below expectations but similar to the September reading. Adding in the volatile food and energy categories that the Fed tends to ignore, headline inflation increased 0.24% MoM (2.6% YoY), mostly in line with expectations. Notably, overall shelter inflation inflation increased from 0.2% MoM to 0.4% MoM, with the key categories of rent of primary residence and owners equivalent rent jointly increasing to 0.38% MoM from 0.36% MoM. However, Chair Jerome Powell has made clear that he’s willing to look beyond the lagged shelter inflation numbers in CPI and is focused on market rent measures. Redfin’s rent data shows that asking rents have largely remained flat for the last two years and show little sign of accelerating. Overall, the specific breakdown of inflation across categories implies a slightly softer reading for core PCE, the Fed’s main inflation gauge, later this month. A more precise PCE forecast will be available after tomorrow’s PPI data is released.
Today’s inflation data helps make the case for another 25 basis point cut at the December 18 Fed meeting—barring an unexpectedly strong jobs report in three weeks—but it may be the last one for a while. While recent data, including today’s report, imply that we will end the year slightly above the Fed’s most recent projection of 2.6% for core PCE inflation, that is unlikely to dissuade them from cutting. The Fed has focused more on labor market conditions in recent months as the balance of risks has shifted from the economy overheating to recessionary concerns, so the December 6th jobs report will ultimately decide whether they move forward with a December cut. Last week’s election of President Trump further complicates the balance of risks by introducing the possibility of much higher tariffs and more extensive tax cuts. Chair Powell said in last Thursday’s Fed meeting that these risks won’t affect their policy until they become certain enough to affect their economic forecast. However, the Fed is widely expected to trim their expectations for 2026 rate cuts from four 25bps cuts in their September projection to just two when they release new projections at the December meeting.
Mortgage rates will be little changed today as bond market investors are squarely focused on the longer-term risk of tariffs and tax cuts, which has been the dominant force pushing mortgage rates higher—even as the Fed has been cutting their policy rate. While Fed policy still matters for the direction of mortgage rates, the uncertainty around how much, if any, of the tariffs and tax cuts become reality will keep mortgage rates volatile. The more volatile rates remain and the more inflation and government deficit risk is introduced by the policies President Trump and Republicans eventually implement, the higher mortgage rates are likely to be.
