Inflation Heated Up in December, as Prices Continue to Weigh on Americans

REUTERS/Kevin Lamarque
Federal Reserve Chair Jerome H. Powell testifies before a House Financial Services hearing on “The Federal Reserve’s Semi-Annual Monetary Policy Report” on Capitol Hill in Washington, U.S., March 8, 2023.

Inflation picked up in late 2024, fueled by an increase in gas prices, the latest sign of stalled improvement on lowering prices as President-elect Donald Trump prepares to take office.

The consumer price index increased by 2.9 percent in December from a year earlier, the Labor Department reported Wednesday, in line with economists’ expectations and hotter than a 2.7 percent rise in November. It was also above a 2.6 percent annual increase in October.

The fresh data underscores the economic concerns of Americans, who voted out incumbents in federal elections in November even as inflation eased for much of the year. They also suggest the Federal Reserve’s success at curbing inflation has potentially plateaued.

On a monthly basis, prices rose 0.4 percent from November. That was the largest increase since March, driven by a rise in energy prices, particularly for gas, which rose 4.4 percent from November. It was the largest monthly increase since August 2023, though gas prices remain lower than where they were a year ago.

Stripping out volatile food and energy categories, so-called “core” inflation was 3.2 percent for the year ending in December – slightly cooler than the 3.3 percent reported in November. That is the smallest annual gain in core prices since August.

Stocks and bonds rallied after the better-than-expected core inflation figures, with the yield on 10-year Treasury bonds trending lower to around 4.7 percent. Bond yields drop when prices rise. Major stock indexes such as the S&P 500 also posted gains following the inflation data and strong quarterly earnings from big banks.

Though the Fed is widely expected to pause interest-rate cuts at its next policy meeting in late January, Wednesday’s softer core figures “reinforce the base case” for two more interest-rate cuts later this year, said Krishna Guha of Evercore ISI.

Overall, prices remain much higher than in 2019, before the pandemic, amid a surge of consumer spending driving up the costs of health care, transportation and other categories of consumer services.

“Service sector inflation has proven quite stubborn due to robust consumer demand driven by a strong jobs market and wage gains above inflation,” said Joe Brusuelas, chief economist at RSM.

Another big factor that has kept monthly prices from falling is housing, although the category – one of the biggest components of the consumer price index – is beginning to ease somewhat. December’s 4.6 percent annual rise in shelter costs was the smallest 12-month gain in about three years.

Still, overall housing prices have shown limited signs of abating, amid a national shortage of new housing and mortgage rates that continue to climb despite three consecutive rate cuts from the Fed. (Mortgage rates track 10-year Treasury rates, which have generally climbed since the Fed began cutting in September.)

Meanwhile, prices for food grew by 0.3 percent on a monthly basis, driven in part by a 3.2 percent rise in prices for eggs. Since December 2023, egg prices were up 36.8 percent.

Though Fed officials expect inflation to continue to cool over time from alarmingly high levels in 2022, the process could take longer than previously expected, in part because of potential trade and immigration policies when Trump takes office.

Trump has promised widespread deportations of undocumented immigrants and across-the-board tariffs on U.S. trading partners, policies that could rekindle inflation depending on how they are implemented.

After cutting interest rates by a full percentage point since September, Fed officials are widely expected to pause rate cuts at their upcoming meeting this month. Investors in the futures market estimate a nearly 97 percent probability of the Fed holding its benchmark rates steady at a range of 4.25 percent to 4.50 percent at its January meeting, according to CME Group.

The central bank’s leaders strive to protect their independence from the White House and avoid commenting on politics or policy proposals. Ahead of the Fed’s last meeting for 2024 in December, its chairman, Jerome H. Powell, said it was premature to discuss the degree to which the president-elect’s proposals – including higher tariffs, lower taxes and deportation of immigrants – would factor into its decisions on interest rates.

But that began to change when Powell acknowledged that some Fed officials involved in forecasting interest rate cuts this year have begun thinking through the ways Trump’s fiscal policies could affect the economy – and that uncertainty around inflation was a reason to move slower on future cuts.