Prime Highlights:
Core inflation rate decelerates to 3.2%, down from 3.3% in November.
The Consumer Price Index (CPI) increased by 0.4% month-over-month, bringing the annual inflation rate to 2.9%.
Shelter prices see the smallest year-over-year increase since January 2022, rising 4.6%.
Key Background:
The U.S. core inflation rate showed signs of moderation in December, registering a 3.2% annual increase, slightly better than the expected 3.3%. This marked a decrease from the previous month’s 3.3%, providing some relief as the year concluded. The Consumer Price Index (CPI), which measures overall price changes, rose by a seasonally adjusted 0.4% month-over-month, bringing the 12-month inflation rate to 2.9%, in line with economists’ forecasts.
Excluding volatile food and energy prices, the core CPI rose by 0.2% month-over-month, also lower than the anticipated 0.3% increase. The overall CPI’s increase was mainly driven by a 2.6% surge in energy prices, including a notable 4.4% rise in gasoline prices, which accounted for approximately 40% of the monthly CPI increase. Food prices also saw a 0.3% rise, with a 2.5% increase on an annual basis in 2024.
Shelter prices, which make up about a third of the CPI’s total weight, climbed 0.3% in December. However, the year-over-year increase of 4.6% was the smallest since January 2022, signaling potential relief in housing costs. Prices for services, excluding rents, rose by 4% compared to the previous year, reflecting the slowest pace since February 2024.
While inflation has been cooling, the Federal Reserve’s 2% inflation target remains distant. This report, along with other recent data, has led analysts to predict that the Fed may keep interest rates unchanged at its upcoming meeting later this month. The market’s positive reaction to the report, seen in a surge in stock futures and a drop in Treasury yields, suggests investors are optimistic about inflation easing, although concerns about persistent inflation in key sectors such as housing, energy, and transportation remain.
Despite some relief in inflationary pressures, inflation-adjusted hourly earnings declined by 0.2% in December, underscoring ongoing challenges for workers. Economists view the current inflation trends as a “last mile” problem, with inflationary pressures in sectors like energy, food, and shelter showing signs of easing, though progress remains slow. While inflation may not be cooling rapidly, there are signs that long-term pressures could continue to diminish.