The prices consumers pay for a variety of goods and services rose again in December, but 2024 closed with slightly better news on inflation, particularly on housing.
The consumer price index increased by a seasonally adjusted 0.4% on a monthly basis, bringing the 12-month inflation rate to 2.9%, the Bureau of Labor Statistics reported on Wednesday. Economists polled by Dow Jones were looking for readings of 0.3% and 2.9%, respectively.
However, excluding food and energy, the core annual CPI rate was 3.2%, down from the previous month and slightly better than the 3.3% forecast. The core measure rose 0.2% on the month, also 0.1 percentage point less than expected.
Much of the CPI increase came from a 2.6% increase in energy prices in the month, which was fueled by a 4.4% increase in gasoline prices. That was responsible for about 40% of the index’s gain, according to the BLS. Food prices also rose, by 0.3% on a monthly basis.
On an annual basis, food grew by 2.5% in 2024, while energy fell by 0.5%.
Shelter prices, which make up about one-third of CPI weights, rose 0.3% but were up 4.6% year-on-year, the smallest one-year increase since January 2022. Non-rent services prices rose 4% year-on-year, slowest since February 2024.
Stock futures contracts rose after the announcement while government bond yields fell.
While the numbers compare favorably to forecasts, they still show the Federal Reserve has work to do to reach its 2% inflation target. Headline inflation eased from its 3.3% rate in 2023, while core inflation stood at 3.9% a year ago.
“Today’s CPI could help the Fed feel a little looser. It won’t change expectations for a break later this month, but it should curb some talk that the Fed might raise rates,” said Ellen Zentner, chief economic strategist at Morgan Stanley Property Management. “And judging by the market’s initial reaction, investors seem to have felt some relief after several months of tougher inflation readings.”
This week’s inflation readings — the BLS released its Product Price Index on Tuesday — are expected to keep the Fed on hold when it convenes its policy meeting later this month.
While the market welcomed the CPI release, the news was less positive for workers: monthly inflation-adjusted hourly wages fell 0.2%, bringing the annual gain to just 1%. BLS said in a separate statement.
Details in the inflation report were otherwise mixed.
Used car and truck prices jumped 1.2%, while new vehicle prices also rose 0.5%. Transportation services rose 0.5% and rose 7.3% year-on-year, while egg prices jumped 3.2%, lifting the annual gain to 36.8%. Auto insurance rose 0.4% and was up 11.3% year-over-year.
“The inflation rate is currently struggling with a ‘last mile’ problem, where progress in reducing price pressures has slowed,” said Sung Won Sohn, a professor at Loyola Marymount University and chief economist at SS Economics. “Key drivers of inflation, including fuel, food, vehicles and housing, remain ongoing challenges. However, there are signs of hope that long-term inflationary pressures may continue to ease, supported by slowing trends in critical sectors such as housing and labor costs.”
The report comes amid market concerns about the state of inflation and the Fed’s possible response. Tariffs and mass deportations chosen by the president Donald Trump has vowed to raise concerns about inflation.
The growth in the number of jobs in December was much higher than economists expected, s a gain of 256,000 further raising concerns that the Fed could remain on hold for an extended period and even consider raising interest rates if inflation turns out to be sharper than expected.
December’s CPI report, along with Tuesday’s relatively weak wholesale price reading, shows that while inflation is not easing dramatically, it also shows no signs of reaccelerating.
A separate report from the New York Fed released on Wednesday showed a contraction in manufacturing activity, but prices paid and received rose sharply.
Futures pricing remains almost certain the Fed will remain on hold at its January 28-29 meeting, but it leans toward a nearly 50-50 chance of two rate cuts during the year, assuming a quarter-percentage-point hike, according to the figures CME Group. Markets expect the next cut to likely take place in May or June.
The Fed uses the Commerce Department’s personal consumption expenditure price index as its primary measure of inflation forecasting. However, CPI and PPI measures are included in that calculation.
The two readings likely mean core PCE will rise just 0.2% in December, keeping the annual rate at 2.8%, according to Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics.