CPI edged higher in December, complicating the Fed's upcoming decision on rate cuts
Inflation rose 2.9% on an annual basis in December, with the latest Consumer Price Index illustrating the Federal Reserve's challenge in battling stickier-than-expected price increases.
Last month's CPI was forecast to come in at 2.8%, according to economists surveyed by financial data firm FactSet. The Consumer Price Index, a basket of goods and services typically bought by consumers, tracks the change in those prices over time.
Still, there are some signs of progress in the Fed's inflation battle. Core CPI, or prices excluding the volatile energy and food costs, rose 3.2% on an annual basis, lower than the 3.3% rate expected by economists. It also marked the smallest increase in core CPI since July 2024, according to PNC Financial Services Group.
The Federal Reserve began cutting rates in September following a flurry of hikes that helped tame inflation after it hit a four-decade high of 9.1% in June 2022. Yet the Fed has struggled with the last leg of its inflation battle in pushing the CPI to a 2% annual rate, and December's reading could convince the central bank to hold off on another rate cut at its next meeting, scheduled for Jan. 29.
Good signs on inflation
The cooler-than-expected core CPI data reassured Wall Street that inflation isn't on a renewed upward trend, according to economists at High Frequency Economics in a research note. Stock gained on Wednesday morning, with the S&P 500 rising 95 points, or 1.6%, to 5,937 in early trading.
"There surely is no evidence of either a crash in prices — as one might expect to see in a crashing economy — or a renewal of upward pressure on prices," they wrote.
Given the mixed inflation data, some economists predicted the Fed is likely to hold off on a rate hike at its Jan. 29 meeting, although they added that the improvement in the core CPI bolsters the possibility of cuts later in 2025.
"After recent red-hot data, today's softer-than-expected core CPI reading should help cool fears of a reacceleration in inflation," said Tina Adatia, head of fixed income client portfolio management at Goldman Sachs Asset Management, in an email. "While today's release is likely insufficient to put a January rate cut back on the table, it strengthens the case that the Fed's cutting cycle has not yet run its course."
At the same time, economists are expressing concern about the incoming Trump administration's economic plans — a mix of new tariffs, tax cuts and mass deportations — which they say could reignite inflation.
That could come as consumers are continuing to feel the pinch of higher costs. Prices in December accelerated due to higher gasoline prices, which rose 4.4% from the prior month, as well as food and housing, according to the report released Wednesday by the Bureau of Labor Statistics.
While Wall Street is interpreting the December report favorably, the CPI report signals "little relief to most consumers," noted David Royal, chief financial and investment officer at financial services company Thrivent, in an email. "Food prices, which had been tame in the first half of 2024, continued their acceleration, increasing 0.3% in December."
He added, "[T]he increases in prices of items closely watched by consumers could continue to be a drag on consumer confidence, which has already shown weakness on inflation concerns."
