December’s Consumer Price Index (CPI) will serve as the latest test of whether an inflation resurgence is a risk to the US economy as investors debate if and when the Federal Reserve will cut interest rates in 2025.
The report, set for release at 8:30 a.m. ET on Wednesday, is expected to show headline inflation of 2.9%, an uptick from November’s 2.7% annual gain in prices. Consumer prices are expected to have risen 0.4% over the prior month, also ahead of the 0.3% monthly increase seen in November.
Seasonal factors like higher fuel costs and continued stickiness in food inflation are widely expected to keep the headline figures elevated.
On a “core” basis, which strips out the more volatile costs of food and gas, prices in December are expected to have risen 3.3% over last year for the fifth consecutive month. Economists expect monthly core price increases to also match the prior month’s reading of 0.3%, according to Bloomberg data.
“Inflation appears to have stalled moderately above the Fed’s target,” Bank of America economists Stephen Juneau and Jeseo Park wrote in a preview of the report.
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Core inflation has remained stubbornly elevated due to higher costs for shelter and services like insurance and medical care. Core services are expected to be little changed in December after airfares and lodging away from home both surprised to the upside in the previous print.
“These categories should moderate in December,” BofA’s Juneau and Park noted. “Shelter prices have cooled relative to earlier in 2024, but there is still room for improvement.”
The team expects rental prices to once again increase 0.2% month over month, while owners’ equivalent rent (OER), or the hypothetical rent a homeowner would pay for the same property, should increase slightly to 0.3%.
Fed’s next challenge: A new administration
Although inflation has been slowing, it has remained above the Federal Reserve’s 2% target on an annual basis.
The election of Donald Trump as the nation’s next president has further complicated the outlook, with some economists arguing the US could face another inflation resurgence if Trump follows through with his key campaign promises. The president-elect will be sworn into office next week.
Trump’s proposed policies, such as high tariffs on imported goods, tax cuts for corporations, and curbs on immigration, are seen as inflationary. And those policies could further complicate the central bank’s path forward for interest rates.
On top of political uncertainties, recent inflation prints have run hot heading into the new year, although producer prices did show some relief in data released on Monday.
“Odds are the December consumer price index won’t sit well with the Federal Reserve,” Oxford Economics chief US economist Ryan Sweet wrote on Friday. The economist said December’s strong labor report further cemented an interest rate pause later this month, especially as central bank leaders have indicated they will take a more gradual easing approach.
As of Tuesday, markets remain split on whether the Fed will cut by 25 basis points in the back half of this year. The odds of a cut in June are currently hovering around 40%.
“Our forecast is the Fed lowers rates three times this year, but the [jobs] report increases the risk that there will be fewer cuts and that the Fed won’t lower rates as early as March, which is currently our baseline,” Sweet wrote in a separate report on Friday. The economist said he needs more evidence of labor market improvements before adjusting his forecast.
Bank of America, meanwhile, revised its outlook to zero rate cuts this year — and warned a hike could also be on the table.
“Inflation is stuck above target, with risks skewed to the upside, activity is strong, and the labor market now appears to have stabilized,” Juneau and Park said.
“Our base case has the Fed on an extended hold, but we think the risks for the next move are skewed toward a hike. In our view, hikes will be in play if year over year core PCE inflation exceeds 3% and long-term inflation expectations become unanchored.”
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
