WASHINGTON (AP) — U.S. inflation accelerated last month as gas prices, eggsand used cars rose, but underlying price pressures also showed signs of easing, bolstering hopes that the Federal Reserve could cut its key interest rate further this year.
The consumer price index rose 2.9% in December from a year ago on Wednesday. report from the Department of Labor, up from 2.7% in November. This is the third consecutive increase after inflation fell to its lowest level in 3 1/2 years. 2.4% in September.
However, excluding the volatile food and energy categories, so-called core inflation fell to 3.2% after remaining frozen at 3.3% for three months. Economists pay close attention to underlying prices because they generally provide a better indication of the future path of inflation.
The report presents a mixed picture, with consumers still struggling with high prices for essentials such as groceries, housing and some services such as airline tickets. At the same time, increases in apartment rental prices are slowly easing and clothing costs barely increased last month. If underlying prices continue to follow December’s pace, inflation should move closer to the Fed’s 2% target.
The report shows that core inflation “is on a downward slope,” said Mike Skordeles, head of U.S. economics at Truist, a bank. “If trends continue, the Fed could still end up cutting interest rates at some point.”
Some likely one-off price hikes have pushed up overall inflation, with gas prices jumping 4.4% in December alone. Prices at the pump have risen much less since then, rising 7 cents on Wednesday from a month ago to $3.09 a gallon.
Food prices had slowed for most of last year, but began to accelerate in the fall, increasing 0.4% in September, 0.5% in November and 0.3% in last month. Egg prices jumped 3.2% in December and 36.8% from a year ago. A bird flu epidemic is decimating numerous flocks of chickensreducing the egg supply.
On a monthly basis, consumer prices increased by 0.4% in December, the largest increase since last March. Core prices rose just 0.2%, after four months of 0.3% increases, a positive sign that some price pressures may be easing somewhat.
Slowdown in core price increases welcomed with relief on Wall Streetwith the Dow Jones industrial average up nearly 700 points, or 1.6%, in early trading. Many economists and investors worry that inflation has remained stuck above the Fed’s 2% target after a steady decline in 2023 and much of last year.
Those concerns have driven up interest rates on Treasury securities, which also pushed up borrowing costs for mortgages, cars and credit cards, even as the Fed lowered its benchmark rate.
The overall rise in consumer prices underscores that inflation remains persistent, even as the threat of potentially inflationary policies from the Trump administration, such as universal tariffs and mass expulsions of illegal migrants, looms.
On Tuesday, Trump said he would create the “Foreign Revenue Service” to collect tariffs, suggesting he expects many duties to ultimately be imposed, although he also said he intended to use them as bargaining chips. During the campaign, he promised to impose tariffs of up to 20% on all imports and up to 60% on goods from China.
David Pennino, chief executive of LogicSource, a procurement outsourcing company, says widespread tariffs could spur inflation.
Universal taxes on imports would increase costs for businesses by making laptops, packaging and office furniture, among other items, more expensive, Pennino said. His company, which manages purchases for about 40 companies including TractorSupply, Titleist and Lululemon, has calculated that universal tariffs could increase the prices of computer equipment by 20 to 30 percent and those of plastic packaging by 15 to 30 percent. 25%.
“I have a hard time seeing how this wouldn’t affect the cost of goods sold and therefore not create an inflationary environment,” Pennino said.
Ali Collier, owner of Main St Market in Glen Rock, Pa., a farmers’ market-style grocery store, said his egg supplier invested in a larger flock last spring and did not raise prices until now, allowing Collier to avoid price increases. This attracted some customers to his store.
“We have had egg dramas in the past,” she said, referring to previous price hikes caused by bird flu. “The more consistent I can be with my pricing, the more good quality, trustworthy people seem to find our store.”
Although most of its produce, soaps and other products are locally sourced, it imports apples, ginger and packaging materials, and is concerned about the impact of tariffs on these prices. It can source more apples from the United States, but fears the tariffs will encourage other companies to buy more from the United States, which would increase its costs.
Last week, minutes of the Fed meeting in December showed that central bank economists expect inflation to remain at the same level as in 2024, lifted slightly by rising tariffs. Wall Street expects the Fed to cut just a quarter point this year, from its current level of 4.3%, according to futures prices.
Other borrowing costs remain high, in part because of higher inflation expectations and few rate cuts. Mortgage rates, heavily influenced by the 10-year Treasury yield, rose for the month fourth consecutive week at 6.9%, well above pandemic-era lows of less than 3%.
Earlier this month, several prominent economists, including former Federal Reserve Chairman Ben Bernanke, agreed that the tariffs would likely have only a minor effect on inflation. The issue was discussed at the annual meeting of the American Economic Association in San Francisco.
Yet even an increase in inflation of just a few tenths of a percentage point could be enough to affect the Fed’s decision-making process, said Jason Furman, a top economic adviser to the Obama administration who moderated a discussion at the conference.
“You’re in a world where Trump’s policies look more like tenths than something cataclysmic,” he said on January 4. “But I think we’re also in a world where the direction, whether rates stay the same, is going down. , or increase, depends on these tenths.
