US Core Inflation Eases to 3.2% in December 2024
The United States witnessed a slight improvement in core inflation in December 2024, bringing some relief to policymakers and markets. The
annual core inflation rate dropped to 3.2%, down marginally from 3.3% in recent months. While this indicates progress, inflation levels remain well above the Federal Reserve's target of 2%, prolonging concerns about price stability.
Here’s a closer look at inflation trends, sectoral impacts, and Federal Reserve plans.
Steady Monthly Core Inflation Trends
On a monthly basis,
core consumer prices rose by 0.2% in December, improving from the 0.3% rate seen in the preceding four months. This stabilization reflects a shift in inflation pressure, particularly in sectors such as housing and medical care where prices have shown moderation.
However, fluctuations in food and energy prices continue to influence overall inflation data, and their exclusion makes the core metric a more reliable gauge for long-term trends.
Sectoral Highlights in Inflation
Key industries experienced varied price pressures, contributing to the inflationary environment:
- Food Prices: Increased by 0.3% month-on-month, highlighting persistent consumer cost growth in grocery and dining expenses.
- Energy Prices: Spiked by 2.6%, marking the largest monthly uptick, driven by higher oil and natural gas prices.
- Vehicles: New and used vehicle prices remain key contributors to inflation, as supply chain constraints resume affecting the sector.
- Housing Rents: Showed steadier increases, aligning with long-term moderation trends, though they still remain a significant cost driver for consumers.
- Medical Care Costs: Saw marginal growth but continue to fare better compared to earlier periods of rapid increase.
These shifts demonstrate a mixed inflation outlook, as certain sectors continue to face pressures while others stabilize.
Federal Reserve Likely to Maintain Rate Pause
Although the core inflation rate has shown improvement, it remains elevated enough to keep Federal Reserve policy hawks in check. With inflation still above the 2% target, analysts forecast that the
Fed will delay rate cuts beyond January 2025.
Market expectations currently predict
40 basis points of rate cuts for the year. However, these financial adjustments are expected to happen in the latter half of the year, starting as late as June.
Economic Growth Headwinds and Fed’s Strategy
The US economy also faces external headwinds, which may further facilitate inflation cooling over time:
- Trade-Weighted Dollar Strength: A nearly 10% jump in the trade-weighted dollar poses challenges to exports and manufacturing, which could lead to slower economic expansion.
- Rising Treasury Yields: The surge in Treasury yields adds pressure to borrowing costs, potentially dampening consumer spending and investment activity.
These factors may ultimately provide the Federal Reserve with a stronger case for loosening monetary policy in the second half of 2025, depending on how inflation trends continue. The gradual decline in inflation bodes well for rate cuts later in the year, but its pace will remain a crucial determinant for the Fed’s strategy.
