WASHINGTON — A closely monitored inflation measure by the Federal Reserve experienced a modest increase last month, while some underlying price pressures appeared to show signs of alleviation.
The most recent inflation data comes as former President Donald Trump has indicated he may implement significant import duties on products from Canada and Mexico, impacting a wide range of goods from automobiles to avocados, which could lead to higher prices in the months ahead.
A report released on Friday by the Commerce Department indicated that consumer prices increased by 2.6% in December compared to the same month in the previous year, up from a 2.4% annual rate in November, marking the third consecutive rise. Excluding the typically fluctuating food and energy sectors, core prices rose by 2.8% year-on-year, the same rate as in November and October.
However, there were some encouraging signs in the report. Short-term measurements showed a slowing in inflation: core prices increased by just 0.2% from the previous month in December, a rate that nearly aligns with the Federal Reserve’s annual target. Core prices are particularly scrutinized by economists and Fed officials as they offer a clearer indication of future inflation trends.
This report comes shortly after Federal Reserve leaders, including Chair Jerome Powell, opted to halt interest rate cuts, partly due to inflation remaining close to the 2.5% mark, which has surpassed their 2% target for six months now.
Over the last three months, core prices have risen at an annual pace of only 2.2%, down from 2.6% reported in November. Typically, businesses increase prices at the beginning of the year, which may elevate inflation slightly when the January data is revealed next month. Economists maintain that the Fed’s preferred inflation gauge should gradually decrease in the following months as higher readings from early last year fall out of the annual calculations.
Nonetheless, there is a growing concern regarding the potential for earlier-than-anticipated tariffs that could inflate prices. Paul Ashworth, chief North America economist at Capital Economics, highlighted this risk in his commentary, identifying it as an “upside risk to inflation.”
Overall, inflation increased by 0.3% in December from the previous month, primarily driven by a surge in gasoline prices. If such monthly rises continued, they could surpass the Fed’s inflation targets.
According to the Commerce Department’s report, consumer spending showed a robust increase of 0.7% in December from the prior month, bolstered by stable wage growth and rising stock and home values. The report noted that incomes climbed by 0.4%, leading to a decline in the savings rate, which dropped to 3.8% from 4.1% as spending outpaced income growth.
Consumers notably increased their expenditures on goods, including electronics and furniture, likely in anticipation of the potential tariffs that Trump has suggested might be enacted, pushing them to purchase more imported manufactured items.
Indicators suggest that lower inflation rates may be forthcoming. Rental prices for apartments and other housing expenses are gradually stabilizing. Additionally, a sluggish labor market has resulted in diminished wage growth, alleviating pressure on companies to raise prices to counterbalance escalating labor costs.
“We seem to be set up for further progress,” Powell stated during a recent press conference, referring to inflation trends. “However, being ‘set up for’ it does not guarantee it. Therefore, we will continue to monitor for further progress in inflation.”
For the time being, Powell indicated that the Fed is likely to maintain its key interest rate at around 4.3%, a full percentage point lower than the peak experienced last year, following three cuts towards the end of 2024. The Fed anticipates that elevated borrowing costs will impact spending and contribute to further declines in inflation.
In the meantime, consumers have driven impressive growth in the economy during the final quarter of last year, which saw a solid annual expansion rate of 2.3%. Growth was more robust in the prior quarter, achieving 3.1%, but the fourth-quarter growth was tempered by a significant reduction in business inventories, which is expected to rebound in subsequent quarters.
