The December Consumer Price Index report showed that overall inflation rose last month, driven largely by a spike in energy prices. But under the hood, a moderation in core inflation offers some reassurance.
The Bureau of Labor Statistics reported Wednesday that the CPI rose 2.9% in December compared with the same month last year, an uptick from November’s 2.7% rate. On a monthly basis, the CPI rose 0.4% in December compared with 0.3% in November. Core CPI, which excludes volatile food and energy prices, rose 2.6% on an annual basis and 0.2% on a monthly basis, compared with 0.3% in November.
CPI vs. Core CPI
Bureau of Labor Statistics.
The data comes as market watchers have dramatically pared back their expectations for interest-rate cuts from the Federal Reserve in 2025 amid strong labor market data, economic growth, and price pressures that remain a little higher than central bankers would like. Inflationary pressures have eased significantly over the past year, but the data has been bumpy over the past few months.
“As it stands, the Fed has very little reason to cut in the upcoming January meeting,” says Morningstar chief economist Preston Caldwell. “With the latest data showing no signs of weakness in the labor market or economic activity, while inflation is still a hair above target, the Fed will skip cutting for at least the next meeting.”
December CPI Report Key Stats
• CPI increased 0.4% for the month after rising 0.3% in November.• Core CPI climbed 0.2% after rising by 0.3% in November.
• CPI increased 2.9% year over year after an uptick of 2.7% the prior month.
• Core CPI rose 3.2% from year-ago levels after rising by 3.3% in November.
Consumer Price Index
Month-over-month changes.
Source: Bureau of Labor Statistics.Gas Prices Drive December CPI Rise
Rising energy prices accounted for more than 40% of the total increase in the CPI, according to the BLS, and gasoline prices increased 4.4% in December. For much of the second half of 2024, falling gasoline prices helped lower the overall inflation rate.
Used-car prices have jumped 6% over the past three months, according to Caldwell, accounting for about 0.5% of the 3.3% annualized jump in the CPI. As with gasoline, falling used-car prices in 2024 helped push headline CPI lower.
Caldwell says the uptick in overall inflation was also spurred by airfares, which rose 3.9% on a monthly basis in December.
Change in Selected CPI Components
Bureau of Labor Statistics.
What’s Next for the Fed?
Investors see a roughly 98% chance that the Fed will hold rates steady at its January meeting, according to the CME FedWatch tool. That’s up from 78% a month ago. That recalibration has come after a surprisingly strong December jobs report. A strong labor market means the Fed has wiggle room to keep policy tight as inflation remains sticky.
Federal-Funds Rate Target Expectations for Jan. 29, 2025 Meeting
Source: CME FedWatch Tool.
Markets aren’t pricing in another rate cut until June at the earliest, but Caldwell thinks one could come sooner if inflation data looks more favorable over the next few months. “The Fed could resume cutting in March if we don’t see a repeat inflation spike in the first quarter 2025, as occurred in 2024,” he says. “That would push year-over-year core inflation sharply down, which would weigh heavily in the Fed’s considerations.”
Caldwell says developments in Washington are also a factor, with the extent of further cuts depending “heavily on policy changes deployed by the new presidential administration and Congress in the beginning months of this year.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
