Inflation rose by 2.9% in December, as expected

Inflation rose again in December as stubbornly high prices continued to weigh on consumers’ finances ahead of the Federal Reserve’s next decision on interest rates.

The Labor Department said on Wednesday that the consumer price index (CPI) — a broad measure of how much everyday items such as gas, groceries and rent cost — rose 0.4% in December, while ticking up to 2.9% year-on-year. The 2.9% reading is the highest since July 2024.

The month-on-month reading came in slightly warmer than expected by economists polled by LSEG, while the annual figure was in line with expectations. The headline figure was up from 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 measures of gasoline and food to better gauge price growth trends, rose 0.2% month-on-month in December, in line with expectations, down from 0.3% the previous month. Core prices rose 3.2% in December from a year ago, slightly cooler than expected and down from 3.3% in November.

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The report found that inflationary pressures in the US 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 on most American households, which are forced to pay more for daily necessities such as food and rent. Price increases are especially difficult for lower-income Americans because they tend to spend more of their already stretched paychecks on necessities and have less flexibility to save money.

Energy costs accounted for more than 40% of the monthly CPI increase, with the Bureau of Labor Statistics’ energy index rising 2.6% in December after energy prices had not changed much in recent months. Gasoline prices rose 4.4% in 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.

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Prices of meat, poultry, fish and eggs rose 0.6% for the month and 4.2% compared to a year ago. Egg prices rose 3.2% in December and are up 36.8% from a year ago due to a bird flu outbreak affecting production.

Housing costs rose 0.3% in December, the same as the increase in November. The Shelter Index is up 4.6% over the past year, the smallest 12-month increase since January 2022.

Transport prices rose 0.5% in December and are up 7.3% from a year ago. Auto insurance prices rose 0.4% in December and rose 11.3% compared to a year ago. Motor vehicle repair costs fell 0.6% in December but rose 7.2% year-on-year.

Airfare rose 3.9% in December and rose 7.9% compared to a year ago.

The data comes as the Federal Reserve is scheduled to meet later this month, where policymakers will decide whether to cut interest rates or keep them steady with inflation above the central bank’s target.

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Fed Chairman 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 close to a point where it will be appropriate to slow the pace of further adjustments.”

Markets expect the Fed to hold rates steady at the upcoming meeting, and the December CPI print did not change those expectations, with the probability of rates remaining 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 doesn’t change expectations for a pause later this month, but it should dampen some of the talk of the Fed potentially raising interest rates. And judging by the market’s initial reaction, investors appeared to be feeling some relief after a few months of stickier inflation measures.”

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Stocks rose after the CPI print, with the S&P 500 index up about 1.3%, while bond yields fell with the 10-year U.S. Treasury note below 3.7%.

“Despite all the noise, inflation is no longer a concern,” said EY chief economist Gregory Daco. “What is of concern are elevated prices that discourage consumer spending for many lower-to-median income families and the risk of renewed inflationary pressures from deregulation, immigration restrictions, tariffs and tax cuts in a ‘supply-side’ environment.”