Higher CPI Inflation in December 2024
CPI Rose 2.9% but Underlying Inflation More Encouraging
In December 2024, the Consumer Price Index (CPI) experienced a notable increase of 0.4%, marking the fastest rise in monthly prices since February. Year-over-year, inflation was measured at 2.9%. While the core inflation rate remained relatively stable at 3.2%, overall inflation progress has stalled since mid-2022.
Despite some positive signs, such as cooling housing prices, concerns about persistent inflation remain, particularly in light of potential economic policies from President-elect Donald Trump. For example, tariffs would push up inflation if not implemented in responsible way. The latest talk from the incoming Trump administration is that tafiffs would be done slow and gradual basis.
Our forecast is for no more rate cuts until possibly later in June 2025. Thus, one more cut for the rest of the year in line with current market forecasts. With 256,000 new jobs added in December 2024, this puts the FED in a difficult position regarding rate cuts in a strong economy. The jobs number was revised in to 212,000 in November. Additionally, the 256,000 job number was significantly higher than market estimates of 160,000.
Key Points
- CPI Increase: December saw a 0.4% rise in consumer prices; a 2.9% increase year-over-year.
- Core Inflation: Stagnated at 3.2% for three consecutive months.
- Economic Concerns: Policymakers worry about slow inflation progress despite a strong labor market.
- Investor Reaction: cautious market reaction following the inflation report, increased unceratainty.
- Future Outlook: Speculation on interest rates suggests they may hold steady amidst ongoing uncertainties from upcoming administration policies.
Economic Implications
The recent CPI data presents a mixed picture for the economy. On one hand, the 0.4% increase in December indicates that consumer demand remains robust, possibly driven by holiday spending. Energy costs were 40% of the increase in CPI. On the other hand, core inflation at 3.2% suggests that underlying price pressures may not be easing as quickly as anticipated. This could lead to a prolonged period of uncertainty for both consumers and businesses.
Labor Market Resilience
Despite inflationary concerns, the labor market continues to show strength. Unemployment rates remain low, and job creation has been steady. This resilience is crucial, as a strong labor market typically supports consumer spending—an essential component of economic growth. However, if wages fail to keep pace with inflation, real purchasing power could diminish, affecting overall consumer confidence.
The Federal Reserve is likely to closely monitor these inflation trends as they consider future monetary policy decisions.
With the presidential transition underway and potential shifts in fiscal policy on the horizon, the Fed will adopt a cautious approach. Interest rate hikes could be paused or adjusted based on incoming economic data, especially if inflation shows signs of stabilizing or decreasing.
In short, uncertainty on how the Trump tariffs will unfold will result in a measured approach by the FED. Thus, expect no rate move in the first quarter of 2025. If there is a rate cut the financial markets are now forecasting in June.
Note that market forecasts of rate cuts have decreased over time. This is due to sticky inflation.
