In the U.S., inflation saw a rise last month, driven by increases in the prices of gasoline, eggs, and used cars. However, there are encouraging signs that underlying price pressures might be easing. This development raises the possibility that the Federal Reserve may consider cutting interest rates later this year.
The latest data from the Labor Department indicated a 2.9% year-on-year increase in the consumer price index for December, higher than the 2.7% noted in November. This marks the third consecutive increase following a decline to a 3.5-year low of 2.4% in September. However, when excluding the more volatile categories of food and energy, known as core inflation, there was a decrease to 3.2%, down from a steady 3.3% over the previous three months. Economists often focus on these core prices as they can provide a clearer view of inflation’s trajectory moving forward.
The overall report paints a mixed picture; consumers continue to face elevated prices for essential items like groceries and housing, alongside certain services such as airfares. Nonetheless, rental costs for apartments are gradually moderating, and clothing prices saw little change last month. If core prices maintain their December trend, inflation could approach the Federal Reserve’s 2% target in the near future.
Economist Mike Skordeles from Truist remarked that core inflation appears to be on a decline. He suggests that if these trends persist, the Federal Reserve may find itself in a position to lower rates at some point down the line. Factors such as one-off spikes in prices have contributed to the overall inflation, highlighted by a notable 4.4% increase in gas prices during December. Subsequently, prices at gas stations have surged slightly to $3.09 a gallon as of Wednesday.
Food prices had seen a slowdown for much of last year but began to rise again in the fall, with grocery prices climbing by 0.4% in September, 0.5% in November, and then 0.3% in December. Egg prices surged by 3.2% in December alone and are now 36.8% higher than a year prior due to an avian flu outbreak that has severely impacted chicken populations.
In December, consumer prices increased by 0.4%, marking the largest monthly rise since the previous March. Core prices, however, only saw a 0.2% increase following a four-month trend of 0.3%, suggesting that certain price pressures could be beginning to ease. This news was welcomed on Wall Street, with the Dow Jones industrial average experiencing a rise of nearly 700 points, or 1.6%, shortly after the report’s release. Economists and investors have shown concern that inflation might be stabilizing above the Federal Reserve’s 2% target, despite a steady decrease over 2023 and much of the previous year.
The uptick in overall prices indicates persistent inflation, even as concerns grow over potentially inflationary actions that could emerge from the former Trump administration, notably including universal tariffs and the mass deportation of unauthorized immigrants. Trump’s recent announcement about establishing an “External Revenue Service” to oversee tariffs implies he might be leaning towards implementing significant duties, even as he has also indicated he may use tariffs as negotiation tools. During his campaign, he proposed imposing tariffs as high as 20% on all imports and up to 60% on goods from China.
David Pennino, CEO of LogicSource, a firm specializing in procurement outsourcing, highlighted that widespread tariffs could potentially amplify inflation. He noted that universal import taxes would elevate costs for businesses, making items like laptops, packaging, and office furniture pricier. His firm, which manages procurement processes for various companies, projects that universal tariffs could increase computer hardware prices by 20% to 30% and plastic packaging by 15% to 25%.
“I find it hard to see how this wouldn’t affect overall costs, leading to an inflationary stance,” Pennino explained. In Glen Rock, Pennsylvania, Ali Collier, who operates Main St Market, has managed to maintain stable egg prices thanks to a supplier who acquired a larger flock last year. This pricing consistency has attracted customers seeking reliable options amidst fluctuating costs.
While she sources most of her products locally, she does import some items like apples and packaging materials, raising concerns about the potential impact of tariffs on these costs. Although she could procure more apples domestically, the fear is that tariffs would lead to a broader market shift, pushing up her supply expenses.
Recent minutes from the Fed’s December meeting showed that officials expect inflation to remain roughly steady into 2024, with potential upward pressure from increased tariffs. Market expectations suggest the Fed may execute just one quarter-point cut in 2024 from the current rate of 4.3%.
Other borrowing costs continue to remain elevated, driven in part by heightened inflation expectations and limited cuts. Mortgage rates have risen for the fourth consecutive week, reaching 6.9%, a significant climb from the pandemic lows of below 3%.
At a recent conference, several influential economists, including former Federal Reserve Chair Ben Bernanke, agreed that tariffs are unlikely to have a significant effect on overall inflation. However, Jason Furman, who served as a top economic advisor during the Obama administration, noted that even a slight increase in inflation could influence the Fed’s decision-making process. “In the current environment, every small fluctuation carries weight in determining whether rates will remain stable, decline, or rise,” he stated.
