The US consumer price index (CPI) saw a 0.4% increase in December, slightly surpassing November’s 0.3% rise, according to the Bureau of Labor Statistics. This uptick was largely attributed to higher costs for energy goods, keeping inflation elevated. On a year-over-year basis, the CPI climbed 2.9% in December, up from 2.7% in November, aligning with economists’ expectations. US Fed FOMC meeting is on January 28-29.

Inflation Remains Above Target

Despite gradual progress in reducing inflation, the Federal Reserve’s 2% target remains elusive. The second half of 2024 marked challenges in stabilizing prices, with inflation rates stubbornly higher than projected. This persistent elevation has prompted the Fed to revise its expectations for interest rate cuts in 2025.

Factors Influencing Inflation

Several factors are contributing to sustained inflation:

  1. Resilient Economy: Strong consumer spending and labour market conditions are bolstering demand, pushing prices higher.
  2. Tariff Threats: The possibility of broad tariffs on imported goods adds to cost pressures across industries.
  3. Immigration Policies: Mass deportations of undocumented immigrants, considered inflationary, could further strain certain sectors reliant on low-cost labour.

Fed’s Adjusted Monetary Policy Path

Given the inflationary pressures, the Federal Reserve has adjusted its outlook, projecting a slower pace of rate cuts in 2025. Policymakers are taking a cautious approach, balancing the need to curb inflation with maintaining economic growth.

As the Federal Reserve continues to monitor inflation closely, its decisions on interest rates will play a pivotal role in shaping the economic landscape. Energy prices and policy uncertainties remain key factors to watch, as they will influence the trajectory of inflation and the broader economy in the coming months.

The December CPI data underscores the challenges the U.S. faces in returning to pre-pandemic inflation levels. While progress has been made, achieving the Federal Reserve’s 2% target will require careful policy adjustments and a keen eye on external factors impacting inflation.

(With Reuters inputs)