The Bureau of Labor Statistics released December's Consumer Price Index data on Tuesday. The core CPI, which excludes volatile food and energy prices, showed annual inflation at 2.6%. This matched the rate recorded in September and November.
Economists had expected a 2.7% reading. The actual figure brought inflation closer to the Federal Reserve's 2% target. No October data was available due to a government shutdown.
Average mortgage rates stood at 6.16% for 30-year loans at the start of 2026, according to Freddie Mac data. This represented a decline from the 6.91% average recorded in the first week of 2025.
The Federal Reserve monitors inflation data to determine policy adjustments, including changes to the federal funds rate. This benchmark interest rate influences borrowing costs throughout the economy.
When inflation runs high, the Fed typically raises the federal funds rate to curb economic activity. Conversely, it may lower the rate when inflation is too low. The Fed aims to maintain inflation around 2%.
December's inflation reading suggests little immediate pressure for the Fed to adjust rates at its late January meeting. Mortgage rates often move in response to such policy decisions.
The Fed also produces regular inflation forecasts. Its December 2025 projection anticipated 3.4% inflation for the coming year, based on CPI and Personal Consumption Expenditures data.
Fannie Mae's December Housing Forecast predicted a gradual decline in mortgage rates throughout 2026, with the average 30-year rate approaching 5.9% by year's end.
Inflation affects housing beyond mortgage rates. Rising costs for materials and labor can increase home prices. Closing costs and related services may also become more expensive.
Higher prices could reduce housing demand, potentially making markets less competitive for buyers. Homeowners may benefit from inflation through increased property values and equity.