Inflation Cools and Pushes Rates Lower

What Is Happening Today

Mortgage rates are improving as the newest inflation data came in cooler than expected, supported by declining shelter costs and weakening rental price levels. Markets had been anticipating signs that inflation would cool heading into year end, and this morning’s Consumer Price Index release delivered exactly that. Bond markets reacted positively, driving mortgage pricing higher early today.

Shelter inflation has been the biggest force keeping inflation elevated in recent years. With new rental data showing continued declines, particularly in single family rentals, inflation is now breaking lower at a noticeable pace. That shift is helping ease financial pressure on rate markets and reinforcing expectations for a friendlier rate environment going into 2026.

At the same time, early jobless claims data continues to reflect a mixed labor picture. Claims are bouncing around due to the holiday period, but overall levels remain historically elevated, suggesting the labor market is gradually weakening. Markets are paying close attention to these trends because a softer labor market reduces inflation pressure, giving rates more room to improve.

Today’s inflation headline, combined with cooling wage conditions and easing shelter pricing, represents another positive step toward long term rate stability.

Cooling Inflation Data

Headline inflation increased 0.2% month to month, or 0.1% per month on a smoothed two-month basis
Year over year inflation declined from 3% to 2.7%
Both results came in well below market estimates and expectations
Core inflation, excluding food and energy, increased 0.1% in October and November
Year over year core inflation fell from 3% to 2.6%

These figures show two consecutive months of declining inflation momentum, a trend markets have been waiting for.

Energy Price Movement

Average energy costs rose 0.55% over the last two months
Weakness in oil prices, including a sharp WTI pullback, should bring additional relief in upcoming readings

Energy, while volatile, is now trending lower and contributing less upward pressure to inflation than earlier in the year.

Shelter Inflation Turning Lower

Shelter represents roughly 44% of the core inflation index
Shelter inflation only rose 0.1% per month over the last two months
Year over year shelter inflation fell from 3.6% to 3%
Lodging Away From Home dropped 8% over the last two months
New rental reports continue to show price declines
Cotality single family rental index declined 0.9% month over month in October, the fourth straight decline
Index reading now sits at a 15-year low for single family rent growth

Shelter has been the biggest obstacle preventing inflation from falling faster. These new readings suggest significant progress.

Rental Market Trends

Single family rentals are weakening faster than multifamily
Many local rental markets are showing negative results year over year
Ongoing weakness here is expected to support lower inflation in 2026

New rent contracts are feeding into the inflation model with a lag, meaning today’s data should continue improving next year.

Jobless Claims Movement

Initial weekly jobless claims fell 13,000 to 224,000
This series remains bumpy due to holiday reporting
Continuing claims rose to 1.9 million, near multi-year highs
Labor markets are showing signs of slowed hiring

Jobless activity is consistent with a gradually cooling labor economy.

What to Watch Next

Additional inflation trend confirmation in coming reports
Ongoing shelter cost declines through updated rental data
Continued volatility in jobless claims
Market expectations for future Fed rate decisions

Upcoming CPI releases will help determine whether this trend accelerates.

Bottom Line

Inflation is moving lower in a meaningful way, driven largely by falling shelter costs and improving rental data. Mortgage markets welcomed this morning’s update, helping drive rates lower as investors gain confidence that inflation pressure is easing. While volatility remains possible, today’s numbers support the view that long term rate relief is finally gaining traction.

Softening jobless claims and continued progress in shelter data reinforce the idea that inflation may cool further heading into 2026. This environment positions mortgages favorably, especially if rental declines continue feeding into inflation calculations over the next several months.