Inflation Concerns Loom as December CPI Report Approaches
As the US economy enters a new year, investors are bracing for the latest Consumer Price Index (CPI) report, set to be released on Wednesday. The December CPI will provide crucial insights into whether inflation is resurging, and if so, what it means for interest rates in 2025.
Headline Inflation Expected to Tick Up
Economists predict a 2.9% annual gain in prices, up from November’s 2.7%. This increase is attributed to seasonal factors such as higher fuel costs and persistent food inflation. On a month-over-month basis, consumer prices are expected to rise 0.4%, surpassing November’s 0.3% increase.
Core Inflation Remains Elevated
The core CPI, which excludes volatile food and gas prices, is expected to show a 3.3% annual increase, marking the fifth consecutive month above 3%. Monthly core price increases are anticipated to match November’s 0.3% reading. According to Bank of America economists, core inflation has remained stubbornly high due to elevated costs for shelter and services like insurance and medical care.
Shelter Prices Still a Concern
While shelter prices have cooled somewhat, there is still room for improvement. Rental prices are expected to increase 0.2% month over month, while owners’ equivalent rent (OER) is predicted to rise 0.3%. These figures will be closely watched, as they have a significant impact on core inflation.
Political Uncertainties Complicate Outlook
The election of Donald Trump as president has introduced new variables into the inflation equation. His proposed policies, including high tariffs, tax cuts, and immigration curbs, are seen as inflationary and could further complicate the Federal Reserve’s path forward for interest rates.
Interest Rate Uncertainty
Recent inflation prints have run hot, and the strong labor report has cemented an interest rate pause later this month. Markets are split on whether the Fed will cut rates by 25 basis points in the back half of this year, with odds hovering around 40%. Some economists, like Oxford Economics’ Ryan Sweet, predict the Fed will lower rates three times this year, while others, like Bank of America, foresee no rate cuts and even a potential hike.
Fed’s Next Move Uncertain
As the Fed navigates the complex landscape of inflation, labor market improvements, and political uncertainties, its next move remains unclear. One thing is certain, however: the December CPI report will play a critical role in shaping the central bank’s decision-making process in the months ahead.
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