Inflation As Expected, Housing Contracts Stall

The Fed’s preferred inflation measure came in as expected, while winter weather and the holidays slowed momentum in signed housing contracts. Here’s a look at the key highlights.

·       PCE Inflation Data Offers Encouraging Signs

·       Pending Home Sales Slide

·       Q3 GDP Surges to Fastest Pace Since 2023

·       Claims Data Reflect Low Layoffs, Low Hiring and the Gig Economy

PCE Inflation Data Offers Encouraging Signs

The government released the delayed Personal Consumption Expenditures (PCE) report for October and November, with results largely matching expectations. Headline and core inflation both rose 0.2% in each month, leaving the annual rate at 2.8%. Core PCE, which excludes food and energy, is the Federal Reserve’s preferred inflation measure.

What’s the bottom line? The Fed continues to balance lingering inflation pressures against signs of a cooling labor market. Persistent inflation argues for caution on rate cuts, while softer employment data increases pressure to ease policy. The Fed lowered its benchmark Federal Funds Rate by 25 basis points three times last fall. While this rate does not directly determine mortgage rates, it influences borrowing costs across the broader economy.

Fed Chair Jerome Powell has emphasized that there is “no risk-free path,” highlighting that both inflation and labor market trends will shape policy decisions in the months ahead.

Encouragingly, the monthly inflation readings for October (0.21%) and November (0.16%) were relatively low. Looking ahead, inflation progress could improve further if monthly readings remain subdued early this year. Higher readings from January and February 2025 (0.31% and 0.45%) will roll off the 12-month average, potentially making it easier to see faster progress toward the Fed’s 2% inflation target.

Pending Home Sales Slide

Pending Home Sales declined 9.3% from November to December after rising in each of the prior four months, according to the National Association of REALTORS® (NAR). Signed contracts on existing homes were also down 3% from a year earlier.

What’s the bottom line? NAR Chief Economist Lawrence Yun said December data can be difficult to interpret because holidays, time off and winter weather often disrupt normal home-search activity. He noted they’ll be monitoring upcoming reports to determine whether the decline reflects a one-off seasonal dip or the start of a broader slowdown.

Yun also pointed to tight supply as a key factor. While closings rose in December, new listings failed to keep up, pushing inventory lower. With just 1.18 million homes on the market last month – matching the lowest level of 2025 – limited choices may have discouraged buyers from signing contracts.

Q3 GDP Surges to Fastest Pace Since 2023

After a delay caused by the government shutdown, the final estimate for Q3 2025 GDP is in. The U.S. economy grew at a 4.4% annualized rate – slightly above the initial 4.3% estimate and the strongest quarterly growth since Q3 2023.

This marks a clear acceleration from 3.8% growth in Q2 and a sharp rebound from the 0.6% contraction in Q1. For the first nine months of the year, the economy is now averaging 2.5% growth.

What’s the bottom line? GDP is a broad measure of economic health, capturing consumer spending, business investment, government spending, and net exports. Consumer spending – the largest component – was particularly strong, driven in part by a surge in electric vehicle purchases ahead of the EV tax credit expiration at the end of Q3.

Growth was also supported by stronger exports, increased investment, and higher government spending. A decline in imports, which subtract from GDP, provided an additional boost.

Claims Data Reflect Low Layoffs, Low Hiring and the Gig Economy

Initial jobless claims rose by 1,000 to 200,000 in the latest week, remaining low by historical standards. Continuing claims – workers receiving benefits beyond the first week – fell by 26,000 to 1.849 million.

What’s the bottom line? First-time claims remain low, reflecting limited layoffs and the growing role of the gig economy. More displaced workers are choosing contract or app-based work instead of filing for unemployment, as benefit levels often fall short of covering housing, living expenses and insurance costs.

At the same time, continuing claims remain elevated, signaling that unemployed workers are taking longer to find new jobs.