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Inflation rose faster than expected in December, but core inflation was softer than expected as the Federal Reserve weighs a slower pace of interest rate cuts in 2025.
The consumer price index rose 0.4% last month, bringing the annual inflation rate to 2.9%, the Bureau of Labor Statistics reported Wednesday. That was slightly above expectations of 0.3% monthly and 2.8% annual inflation, according to estimates compiled by FactSet (FDS+0.01%).
On the other hand, core CPI, excluding volatile food and energy, rose just 0.2% to 3.2% — a hair below analyst expectations and a welcome sign that progress on inflation is still on track. Much of that was driven by a 2.6% monthly increase in the energy index, including a 4.4% jump in gasoline.
“Wednesday’s softer-than-expected CPI print offers some relief, especially after last Friday’s hot employment numbers, that the Fed may be able to still cut interest rates in 2025,” said Skyler Weinand, chief investment officer at Regan Capital, in a statement.
This comes after a string of positive news for the economy. On Tuesday, the BLS reported that wholesale inflation, as measured by the producer price index, unexpectedly cooled, rising just 0.2% in December. The latest jobs report showed payrolls rose by 256,000 jobs that same month, smashing Wall Street’s expectations. And unemployment also ticked down to 4.1%, falling 0.1 percentage point from a month prior and below analysts’ projections.
“The market may have had its hair on fire about inflation running away again, but the data do not support that conclusion,” Jamie Cox, managing partner for Harris Financial Group, said in a statement.
Central bank officials have expressed concern about a potential resurgence in inflation this year, particularly given the possibility of inflationary policies put forward by the incoming Trump administration.
“Almost all participants judged that upside risks to the inflation outlook had increased,” the minutes of the December Federal Open Market Committee meeting said. “As reasons for this judgment, participants cited recent stronger-than expected readings on inflation and the likely effects of potential changes in trade and immigration policy.”
In November, the personal consumption expenditures price index — the Fed’s preferred inflation gauge — rose 0.1% on a monthly basis, for an annual inflation rate of 2.4%. Although that was still well above the Fed’s 2% goal, it came in lower than expected for the month.
The Bureau of Economic Analysis is set to release the December PCE figures on Jan. 31.
Last month, the Federal Open Market Committee carried out its third and final reduction of the federal funds rate of 2024. The central bank’s decision-making arm voted to lower the benchmark interest rate by a quarter point to 4.25%-4.50%, for a total of 100 basis points in cuts for the year.
In its updated Summary of Economic Projections, Fed officials indicated that they may carry out just two interest rate reductions in 2025, given 25-basis-point cuts.
“As for additional cuts, we’re going to be looking for further progress on inflation as well as continued strength in the labor market,” Fed Chair Jerome Powell said in a press conference following the decision. “And as long as the economy and the labor market are solid, we can be cautious as we consider further cuts.”
Central bank officials expect both core and headline PCE inflation to tick down slightly to 2.5% by the end of this year, still considerably above the Fed’s 2% target level.