Inflation picked up in December, CPI report shows. What will it mean for Fed rate cuts?

After tumbling in the fall, inflation edged up in December, underscoring that it’s too soon to sound an all-clear signal after the biggest spike in consumer prices in four decades.

A rise in basic living expenses – rent, as well as food and gasoline prices – was the main culprit. Used car prices also rose unexpectedly.

Inflation is broadly headed lower but a more gradual descent could lead the Federal Reserve to keep interest rates higher for longer.

Last month, overall prices rose 3.4% from a year earlier, up from 3.1% in November, according to the Labor Department’s consumer price index. On a monthly basis, costs increased 0.3% after virtually flatlining the previous two months.

What is core inflation right now?

Core prices, which exclude volatile food and energy items and are watched more closely by the Fed, increased 0.3% for the second straight month. The advance still lowered the annual increase from 4% to 3.9%, the smallest since May 2021.

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"The December CPI was disappointing for those looking for a continued easing of U.S. inflation," economist Jason Schenker of Prestige Economics wrote in a note to clients.

Is inflation really going down?

Inflation has slowed significantly since reaching a 40-year high of 9.1% in June 2022 but the path has been winding. More recently, in October and November, price gains pulled back substantially as food and gasoline costs climbed more slowly or slumped, and used car prices dropped.

But even as goods prices have come down as pandemic-related supply chain snarls unwind, the cost of services such as rent, car repairs and auto insurance has steadily moved higher. Blame, at least, in part, briskly rising employee wages tied to pandemic-induced labor shortages.

Amber Gavriluk, of Derry, New Hampshire, used to eat out with her husband three times a month and order in, typically a pizza, once or twice a week. But a dinner at a restaurant costs $90 to $100, compared with $60 to $70 before the inflation run-up, and a large pizza costs $30, she says.

So after enduring the higher prices for a year or two. Gavriluk says the couple have had enough. They’ve decided to dine out or order in just once a month.

“It was one of our (New Year’s) resolutions,” Gavriluk, 43, says. “We just cut it off…It’s difficult to order a pizza for $30 when I can buy a pizza at the grocery store for $10.”

They’re using the extra money to pay higher utility and mortgage bills. And although Gavriluk appreciates the sharp decline in gasoline prices over the past 18 months, she asks, “Is that enough to offset everything else?”

Will the Fed cut rates in 2024?

In December, Fed Chair Jerome Powell said the central bank was likely done raising its key interest rate after pushing it to a 22-year high of 5.25% to 5.5% to tame inflation. Fed officials also forecast three rate cuts in 2024, more than economists expected.

The stock market, in turn, soared near a record high and 10-year Treasury yields fell further, prompting some Fed officials to push back at the belief that they would start trimming rates as soon as March. On Wednesday, New York Fed President John Williams said officials won’t start lowering rates until inflation moves toward the Fed’s 2% goal “on a sustainable basis.”

After Thursday's inflation report, Kathy Bostjancic, chief economist of Nationwide, said she doesn't expect the Fed to reduce rates until May at the earliest,

Why are gas prices getting higher?

Gasoline prices rose 0.2% in December after falling 6% the previous month, and they’re down 1.9% from a year earlier. Although pump prices declined 5.8%, they didn’t drop as much as they usually do in December, increasing on a seasonally adjusted basis.

Are food prices going down in 2024?

Grocery prices rose just 0.1% for the second month in a row, lowering the annual increase to 1.3% and providing consumers some relief from double-digit yearly price gains in 2022. The cost of commodities such as wheat and corn generally have come down this year amid increased production, including a bumper wheat crop in Russia.

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Last month, the price of breakfast cereal fell 2.4%, bread was down 0.3%, uncooked ground beef declined 0.7% and fish slipped 1%. But egg prices jumped 8.9% amid a partial resurgence of last year’s avian flu, though costs are still down 23.8% over the last year. And bacon prices increased 0.3%.

But restaurant bills climbed 0.3% and are up 5.2% annually, largely because of rising employee wages.

Why is rent so high in the US right now?

Rent remained a big cause of inflation, jumping 0.4%, slightly below November’s increase. That’s still down from a spate of stronger gains and it nudged down the yearly rise to 6.5%. Economists expect rent increases to moderate, based on new leases, but that shift has been slow to ripple to existing leases.

The price of other services kept drifting higher, with car insurance up 1.5% and 20.3% from a year ago. Airfares jumped 1% and medical care, 0.7%.  

Good prices generally continued to fall. Furniture costs slid 1.2% and appliances dipped 0.2%. Used car prices rose 0.5% after a 1.6% increase the previous month but they generally have been dropping after a pandemic-related surge. Based on wholesale prices, they're soon expected to resume their decline, according to Capital Economics.

Alesia Peterke, of Pleasanton, California, says the price of clothing and other goods “has stabilized,” prompting her to maintain her weekly shopping trips.

But in the past year, her home insurance has shot up from $1,500 to $2,000 and insurance for her family’s three cars leaped from $3,400 to $4,000.

As a result of those extra expenses and a sharp rise in vehicle prices over the past few years, Peterke, 56, is putting off the purchase of a new Volkswagen SUV by an extra year or two. She typically buys a new vehicle every five to six years.

“Pay increases have not kept up, our area was already expensive, and we are currently worried about rumored layoffs” at her husband’s big tech employer, she wrote in an email.