Inflation picked up in December, a new challenge for the Fed

Consumer prices rose faster in December, the latest sign that the Federal Reserve’s fight against inflation may have stalled.

The consumer price index rose 0.4 percent from November and was up 2.9 percent from a year earlier, the Labor Department said Wednesday. It represented a modest acceleration from November on both a monthly and annual basis.

The “core” measure of inflation, which strips out volatile food and fuel prices to give a better sense of the underlying trend, was more encouraging: The index rose 3.2 percent from a year earlier after three straight months of 3.3 percent progress. Forecasters had not expected core inflation to slow.

Inflation has fallen significantly since mid-2022, when it hit a four-decade high of more than 9 percent. More recently, however, progress has slowed or even stopped outright: by some measures, inflation barely improved by 2024.

“When you step back and look at the overall state of inflation, we’re not really going anywhere,” said Sarah House, senior economist at Wells Fargo. “Although there has been progress, the pace has been really disappointing.”

Even before Wednesday’s data, Fed officials had expressed growing concern about the slow progress in inflation. At the same time, continued strength in the labor market — including data released last week showing unexpectedly strong job growth in December — has made policymakers less concerned that their efforts to rein in price increases are leading to layoffs or causing damage to the broader economy.

As a result, investors widely expect the central bank to keep interest rates steady at its meeting later this month. That would break a streak of three consecutive rate cuts, and some forecasters now say policymakers may not cut rates at all this year.

“With a labor market stabilizing, with inflation already above target and with risks further to the upside, I think it’s hard to make a case for continuing to cut,” said Aditya Bhave, economist at the Bank of America.

Most Fed officials have said they still expect inflation to gradually cool, and economists agree there are reasons for optimism. Data released Tuesday showed wholesale prices rose more slowly in December.

But politicians face a new source of uncertainty: President-elect Donald J. Trump. The president-elect has promised to impose steep tariffs on imports, limit immigration and cut taxes — policies that economists warn could push prices up further, though it is unclear by how much. Some Fed officials have said they are already factoring those policies into their outlook for inflation.

With price increases proving stubborn and the labor market looking strong, policymakers are unlikely to cut interest rates again until they get a clearer picture of what policies the new administration is adopting and how they will affect the economy, said James Egelhof, the U.S. chief economist at BNP. Paribas

“The Fed has the luxury of having some time to wait for President Trump to take office and to see exactly what happens,” he said.