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Inflation rose again in December as stubbornly high prices continued to strain consumers’ finances ahead of the Federal Reserve’s next decision on interest rates.
The Labor Department on Wednesday said that the consumer price index (CPI) – a broad measure of how much everyday goods like gasoline, groceries and rent cost – increased 0.4% in December while ticking up to 2.9% on an annual basis. The 2.9% reading is the highest since July 2024.
The month-to-month reading came in slightly hotter than expected by economists polled by LSEG, while the annual figure was in line with expectations. The headline figure was up compared with November’s reading of 2.7%, while monthly price growth continued at the same pace as a month ago.
So-called core prices, which exclude more volatile measurements of gasoline and food to better assess price growth trends, were up 0.2% on a monthly basis in December, in line with expectations and down from 0.3% the prior month. Core prices were up 3.2% in December compared with a year ago, slightly cooler than expected and down from 3.3% in November.
The report showed that inflationary pressures in the U.S. economy continue to persist despite progress in bringing inflation closer to the Federal Reserve’s 2% target over the past year.
High inflation has created severe financial pressures for most U.S. households, which are forced to pay more for everyday necessities like food and rent. Price hikes are particularly difficult for lower-income Americans, because they tend to spend more of their already-stretched paycheck on necessities and have less flexibility to save money.
Energy costs accounted for over 40% of the monthly CPI increase, with the Bureau of Labor Statistics’ energy index rising 2.6% in December after energy prices showed little change in recent months. Gasoline prices were up 4.4% for the month of December.
Food prices also rose in December by 0.3% on a monthly basis. Both food at home and food away from home increased by 0.3% last month.
Prices for meat, poultry, fish and eggs were up 0.6% for the month and 4.2% from a year ago. Egg prices rose 3.2% in December and are up 36.8% compared with a year ago amid a bird flu outbreak that has impacted production.
Housing costs rose by 0.3% in December, the same as the increase observed in November. The shelter index is up 4.6% over the past year, which is the smallest 12-month increase since January 2022.
Transportation prices rose 0.5% in December and are up 7.3% from a year ago. Auto insurance prices were up 0.4% in December and are up 11.3% compared with a year ago. Motor vehicle repair costs declined by 0.6% in December but are up 7.2% on an annual basis.
Airline fares increased 3.9% in December and are up 7.9% compared with a year ago.
The data comes as the Federal Reserve is scheduled to meet later this month when policymakers will determine whether to cut interest rates or hold them steady with inflation above the central bank’s target.
Fed Chair Jerome Powell signaled after policymakers met last month and cut the benchmark federal funds rate to a range of 4.25% to 4.5% that “we are at or near a point at which it will be appropriate to slow the pace of further adjustments.”
Markets anticipate the Fed holding rates steady at the upcoming meeting and the December CPI print didn’t alter those expectations, with the probability of rates staying at their current level above 97%, little changed from yesterday and up from 94.7% a week ago, according to the CME FedWatch tool.
“Today’s CPI may help the Fed feel a little more dovish,” said Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management. “It won’t change expectations for a pause later this month, but it should curb some of the talk about the Fed potentially raising rates. And judging by the market’s initial response, investors appeared to feel a sense of relief after a few months of stickier inflation readings.”
Stocks rose following the CPI print, with the S&P 500 index rising roughly 1.3%, while bond yields declined with the 10-year U.S. Treasury note dipping below 3.7%.
“Today’s CPI should provide a boost to markets, relieving some of the anxiety that the US is at the beginning stages of a second inflation wave,” said Seema Shah, chief global strategist at Principal Asset Management. “For the Fed, this is certainly not enough to prompt a January cut. But, if today’s print were accompanied by another soft CPI print next month plus a weakening in payrolls, then a March rate cut may even be back on the table. Perhaps the key takeaway is that markets are likely to be whipsawed over the next few data releases as investors seek a narrative that they can be comfortable with for more than just a few days at a time.
This is a developing story. Please check back for updates.
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