In December, U.S. consumer prices rose, driven by increasing rent and food costs, as distortions from the government shutdown that artificially suppressed November's inflation rate subsided. This solidifies expectations that the Federal Reserve will keep interest rates unchanged this month.
However, the possibility of rate cuts this year remains. Tuesday's Labor Department report showed moderate core inflationary pressures in December, which economists believe suggests that the pass-through of import tariffs to prices is slowing. Economists are divided on whether inflation has already peaked.
Nevertheless, the rising cost of food and rent, which saw the largest price increases in over three years, highlights the affordability crisis facing the President, a situation economists partly blame on administration policies, including broad-based import tariffs.
The President has proposed a series of measures to reduce living costs, including banning institutional investors from purchasing single-family homes and directing the Federal Housing Finance Agency (FHFA), which oversees mortgage giants Fannie Mae and Freddie Mac, to purchase $200 billion in bonds issued by these firms to lower mortgage rates.
High inflation has eroded consumer confidence and the President's approval ratings, and is set to be a major political issue this year as he and his Republican allies fight to maintain control of the U.S. Congress. Compared to investors who are cheered by the moderate pace of inflation, consumers are likely more concerned with rising food prices and rent.
"Households may not track core inflation closely, but they see grocery prices and restaurant meal prices immediately," said Sung Won Sohn, a professor of finance and economics at Loyola Marymount University. "The renewed rise in food prices is not just a statistical detail; it affects public perception, wage negotiations, and ultimately, economic behavior."
The U.S. Bureau of Labor Statistics reported that the Consumer Price Index (CPI) increased 0.3% in December from the previous month. Housing costs, which include rent, rose 0.4%, constituting the primary factor driving the CPI increase.
Food prices rose 0.7% month-on-month, the largest increase since October 2022. Prices for food at restaurants and other outlets also increased by 0.7%, also the largest rise since October 2022. Overall food prices were up 3.1% year-on-year in December. The administration has removed some tariffs on agricultural products to alleviate food price pressures, but economists say it will take time for consumers to see the effects.
The CPI rose 2.7% in December compared to the same month a year earlier, unchanged from November's increase and in line with economists' expectations.
According to Bureau of Labor Statistics estimates, the CPI increased by 0.2% from September to November. The 43-day government shutdown prevented the collection of October price data, forcing the agency to use a "carry-forward imputation" method, particularly for rent items, when compiling the November CPI report. Although November price data was later collected, this occurred in the latter half of the month when retailers were offering holiday season discounts. This carry-forward method assumed October prices remained unchanged.
Following the data release, U.S. stock markets on Wall Street declined, U.S. Treasury yields fell, and the U.S. dollar strengthened against a basket of currencies.
Core inflation was moderate in December. Excluding the volatile food and energy categories, the CPI rose 0.2% from the previous month. According to Bureau estimates, this core CPI increased by 0.2% from September to November. Economists stated that distortions from the shutdown continue to affect the CPI data.
Although the core CPI increase was modest, details within its components showed some strength. Owners' equivalent rent rose 0.3%, while hotel and motel room prices jumped 2.9%. Airline ticket prices surged 5.2%, apparel prices increased 0.6%, and healthcare costs rose 0.4%. The core CPI increased 2.6% year-on-year in December, the same rate as in November.
Economists estimate that residual distortionary effects from the shutdown likely suppressed the annual CPI increase by at least one-tenth of a percentage point. As businesses raise prices at the start of the year, core inflation could accelerate in January.
The Personal Consumption Expenditures (PCE) price index is the Federal Reserve's preferred inflation gauge. Based on the CPI data, economists estimate the core PCE price index rose 0.46% month-on-month and 2.9% year-on-year in December.
The Fed is expected to maintain its benchmark overnight interest rate target range at 3.50%-3.75% at its January 27-28 meeting.
Escalating tensions between Fed Chair Powell and the President have led most economists to predict that no rate cuts will occur before Powell's term ends in May. The administration has initiated a criminal investigation into Powell, who has characterized it as a "pretext" influencing interest rate decisions.
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