WASHINGTON — Inflation in the United States likely increased last month, influenced by rising costs for gas, eggs, and used cars. This may reduce the likelihood that the Federal Reserve will lower its primary interest rate significantly this year.
On Wednesday, the Labor Department is anticipated to announce that the consumer price index (CPI) for December rose by 2.8% compared to the previous year, according to economists polled by FactSet. This marks an increase from November’s 2.7% year-over-year rise and represents the third consecutive rise following a decrease to a 3.5-year low of 2.4% recorded in September.
This uptick could exacerbate existing worries among economists and within financial markets that inflation has become entrenched above the Fed’s target of 2%. Such apprehensions have led to an increase in interest rates on Treasury securities, which has also pushed up borrowing costs for mortgages, automobile loans, and credit cards, despite the Fed’s efforts to lower its key interest rate.
Last Friday’s unexpectedly strong jobs report resulted in a sharp decline in stock and bond prices due to concerns that a robust economy might sustain elevated inflation levels, making it difficult for the Fed to implement further cuts.
When excluding the typically fluctuating categories of food and energy, economists predict that core inflation remained steady at 3.3% in December for the fourth consecutive month.
On a month-to-month basis, prices are projected to have risen by 0.3% in December for the second month in a row, indicating rates above the Fed’s 2% target. Core prices are expected to show a monthly increase of 0.2%.
Some of the price increase can be attributed to one-off factors, such as a rise in egg prices, which has been particularly prone to volatility in recent years. An outbreak of avian flu has severely impacted chicken populations, leading to a diminished egg supply.
Many economists anticipate that inflation will slightly decrease in the upcoming months, as apartment rental rates, wages, and car insurance premiums are expected to grow at a slower pace. However, the economic outlook may be clouded by potential inflationary policies from President-elect Donald Trump.
Trump recently announced plans for the creation of an “External Revenue Service” to manage tariffs, indicating that he expects substantial duties will be applied, even though he has mentioned using them as leverage in negotiations. Throughout his campaign, he proposed imposing tariffs of up to 20% on all imports and as high as 60% on goods from China.
Minutes from the Fed’s December meeting revealed that central bank economists project inflation will remain relatively stable this year and into 2024, potentially pushed upward by increased tariffs. Fed Chair Jerome Powell has stated that the central bank intends to maintain a higher interest rate until inflation aligns with the 2% target. As a result, Wall Street anticipates the Fed will reduce its key interest rate only once this year, decreasing it from the current 4.3% based on futures prices.
Other borrowing costs remain elevated partly due to expectations of increased inflation and the limited prospect of Fed rate cuts. Mortgage rates, heavily influenced by the yield on the 10-year Treasury note, rose for the fourth consecutive week to 6.9%, a significant increase from the record lows of below 3% seen during the pandemic.
Despite a resilient job market, where the unemployment rate has dropped to a low 4.1%, consumer spending continues to drive economic growth. However, if demand surpasses production capacity, it could lead to additional inflationary pressures.
Earlier this month, leading economists, including former Fed Chair Ben Bernanke, converged on the idea that the tariffs likely to be enacted under Trump will have minimal impact on overall inflation levels. This topic was a point of discussion at the American Economic Association’s annual meeting held in San Francisco.
Jason Furman, a prominent economic adviser from the Obama administration, noted during the conference that these tariffs might cause only a slight uptick of a few tenths of a percentage point in annual inflation. Nevertheless, he cautioned that even small increases could significantly influence the Fed’s decision-making process regarding interest rates.
“We find ourselves in a situation where the impacts of Trump’s policies are more about subtle adjustments, rather than anything drastically changing,” he remarked. “Yet, we are also in an environment where whether rates will remain steady, decrease, or increase hinges on those minor adjustments.”
