By Lucia Mutikani
From Washington, there’s been a notable rise in U.S. inflation for December, marking the steepest climb in eight months. This uptick is largely fueled by continued strong consumer spending on both goods and services. As a result, it’s anticipated that the Federal Reserve isn’t rushing to lower interest rates any time soon.
Friday’s report from the Commerce Department highlights that, despite a slight monthly increase in core inflation—excluding food and energy—annual core inflation hasn’t eased since October. This suggests a stagnation in disinflation developments during the last quarter.
For the first time since initiating its policy easing phase in September, the U.S. central bank left rates unchanged on Wednesday. Interestingly, the statement that accompanied this decision omitted previous language about achieving progress towards the Fed’s 2% inflation target. The economic impacts of President Donald Trump’s fiscal, trade, and immigration approaches add a layer of uncertainty to the inflation outlook.
Carl Weinberg, chief economist at High Frequency Economics, noted, “The Fed sees a slowing down of its monetary easing approach because the economy is performing well and inflation rates are only gradually realigning with targets amidst prevailing uncertainties. This data backs that prudent course.”
Last month, the Personal Consumption Expenditures (PCE) Price Index increased by 0.3%—the biggest leap since April. Previously, it had an unchanged 0.1% rise in November, as reported by the Bureau of Economic Analysis. These figures matched economist predictions, with goods prices climbing 0.2% for the first time in five months. This rise can be attributed to higher costs in motor vehicles, parts, and gasoline. Overall price declines were observed in furnishings, durable household equipment, and recreational goods, contrasting with a 0.3% rise in services, driven by increases in transportation, recreation, housing, and utilities.
In the year up to December, PCE inflation rose 2.6%, marking the most significant gain in seven months, surpassing November’s 2.4% increase. This information was part of a preliminary GDP report for the fourth quarter released on Thursday. The Fed uses PCE measures for policy guidance and has already reduced its benchmark interest rate by 100 basis points to between 4.25% and 4.50% since September.
Planned rate cuts are being adjusted cautiously, from four down to two this year, largely due to uncertainties surrounding the Trump administration’s tax cuts and tariffs, viewed as potentially inflationary by economists.
Currently, no further rate reductions are expected until June. After setting aside the fluctuating food and energy components, the PCE price index edged up by 0.2% last month, matching November’s 0.1% gain. Core inflation has consistently grown 2.8% over the past three months annually.
Some economists view the slight core inflation increase, alongside the Bureau of Labor Statistics’ report of rising labor costs in the fourth quarter, as a continued sign of disinflation. Core inflation’s annualized growth was 2.2% in the final three months of the year.
Abiel Reinhart from JPMorgan shared, “This will likely be welcomed at the Fed, but as recent commentary suggests, the committee is willing to be patient on further rate cuts. We anticipate they’ll remain on hold until mid-year.”
Fed Chair Jerome Powell recently highlighted that policymakers are monitoring 12-month inflation rates for better seasonal consistency.
Wall Street reflects an optimistic trend with stocks rising, the dollar strengthening against various currencies, and U.S. Treasury yields increasing.
Labor costs, specifically the Employment Cost Index (ECI), rose 0.9% in the fourth quarter, after a 0.8% gain previously. Year-over-year, labor costs are up 3.8%, the slowest pace since the third quarter of 2021.
The ECI is critical for policymakers, reflecting labor market excess and indicating core inflation, by accounting for job composition and quality changes. Sal Guatieri of BMO Capital Markets said, “The ECI aligns with price stability as long as labor productivity maintains a 2% annual growth. However, deportations may introduce pressure.”
Tariff concerns have prompted a consumer rush to build inventories, boosting spending, which accelerated at its fastest rate in nearly two years during the fourth quarter, aiding economic growth. Consumer spending, which accounts for over two-thirds of U.S. economic activity, surged 0.7% in December following a revised 0.6% November increase. Previously, November’s gain was reported at 0.4%.
Purchases of goods jumped 0.9%, driven by automobiles, food, and energy products. Similarly, service spending rose 0.6%, predominantly in housing, utilities, transportation, healthcare, and services. Economists predict continued proactive purchasing in January.
When adjusted for inflation, consumer spending increased by 0.4%, setting the stage for strong economic growth in the first quarter. Personal income went up by 0.4% following a 0.3% rise in November. As spending outstripped income, the saving rate dropped to a two-year low of 3.8% from November’s 4.1%.
While some economists doubt that low saving rates can maintain post-tariff spending gains, others aren’t alarmed. Nancy Vanden Houten of Oxford Economics stated, “We foresee consumer spending supported by robust balance sheets overall, including unprecedented housing wealth.”
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Paul Simao)
