Inflation Cools as Fed Faces Heat

The Consumer Price Index (CPI), the government's main measure of what Americans pay for goods and services, showed annual inflation holding steady at 2.7% in December. Prices rose 0.3% from November, matching expectations. Shelter costs, which include rent and homeowner expenses, drove most of the monthly increase with a 0.4% rise. Food prices accelerated to 3.1% annually, while energy costs moderated significantly as gasoline prices fell 3.4% compared to last year. The data suggests inflation remains above the Federal Reserve's 2% target but is not accelerating.

Core inflation held at 2.6% annually, its lowest reading since March 2021 and a sign that underlying price pressures continue to ease. The monthly increase of just 0.2% came in below the expected 0.3%, which is encouraging news for the Fed. Shelter remains the largest contributor to core inflation at 3.2% annually, though used vehicle prices are now cooling with a 1.1% monthly decline. Services excluding energy rose 0.3% for the month. The softer-than-expected reading suggests the Fed's interest rate policy is working to bring inflation back toward its 2% goal.

Something interesting is happening in the housing market. For the first time since mid-2025, newly built homes are actually cheaper than existing ones. That's not an accident.

Builders are feeling the squeeze. Their confidence fell again in January, with the NAHB Housing Market Index dropping to 37. Above 50 would signal optimism. Builders aren't there. To move inventory, 40% are now cutting prices—the third consecutive month at that level, something not seen since May 2020—and two-thirds are offering incentives like rate buydowns and closing cost credits. The result? New home prices have dropped 8% from last year, landing at $392,300 in October, roughly $13,000 less than December's median existing home price of $405,400.

Meanwhile, the resale market is finally showing signs of life. December existing home sales jumped 5.1% to their fastest pace in nearly three years, with gains across all four U.S. regions. Lower mortgage rates in the fall helped pull some buyers off the sidelines, and price growth has slowed to a crawl, up just 0.4% from last year.

But here's the catch: there's almost nothing to buy. Existing home inventory sits at just 3.3 months of supply, far below the 5-6 months considered healthy. Many homeowners locked in 3% mortgages during the pandemic and have little reason to sell into today's higher-rate environment. New construction, by contrast, offers nearly 8 months of supply.

The bottom line for buyers? If you're flexible on location and open to new builds, that's where the negotiating power is. The resale market remains tight, competitive, and priced accordingly.

Initial jobless claims—the number of people filing for unemployment benefits for the first time—fell to 198,000 for the week ending January 10, one of the lowest readings in recent months. This figure came in well below market expectations of 215,000. The four-week moving average, which smooths out weekly volatility to show underlying trends, dropped to 205,000—its lowest level since January 2024. Continuing claims—people who remain on unemployment benefits after their initial filing—declined to 1.884 million. These figures reflect a labor market characterized by limited layoffs but also slower hiring, a pattern economists describe as "low firing, low hiring."