- Rate of annual inflation rose to 3.4 percent in December, above analysts’ predictions
- Experts had expected inflation would uptick slightly to 3.2 percent
- The news has sparked fears the Federal Reserve could stave off interest rate cuts
Inflation rose to 3.4 percent in December – above economists’ predictions – sparking fears the Federal Reserve could stave off interest rate cuts this year.
The Consumer Price Index (CPI) was pushed up by housing which drove more than half of the monthly growth, the Department of Labor said. Food prices rose just 0.2 percent between in December.
Overall prices rose 0.3 percent from November – when the rate of annual inflation was at 3.1 percent.
Economists had predicted inflation would edge up slightly by 0.1 percent to 3.2 percent at the end of the year. The above-expected increase means an expected interest rate cut in March is now unlikely, experts said.
Market reaction to the news was minimal on Thursday morning. The S&P 500 was trading flat following the release, having been up about 0.2 percent before the figures came out.
Inflation rose to 3.4 percent in December – above economists’ predictions – sparking fears the Federal Reserve could stave off interest rate hikes this year
Inflation must cool in order to pave the way for interest rate cuts this year after the Fed hiked rates to a 22-year high of between 5.25 and 5.5 percent.
The next Fed meeting is January 31 but it was widely expected officials would vote to hold rates steady at their current level on this date.
Instead economists had put all their hopes on the following March 20 meeting. Traders had priced in a 70 percent-plus probability that the central bank will announce cut rates by 25-basis points on this date.
However experts today agreed the latest data put this plan in jeopardy.
Brian Coulton, chief economist at Fitch Ratings, told Bloomberg: ‘I think the message from this release is that core inflation is proving sticky.
‘This will give the Fed grounds for caution and they are unlikely to cut rates as quickly as the markets currently expect.’
Similarly, Greg McBridge, chief financial analyst at Bankrate, said: ‘Inflation is moving in the right direction but this release should squash any notion investors had of a March rate cut from the Fed.’
But many analysts urged calm on Thursday morning as there remain solid reasons for optimism that prices will continue to come down this year.
The Consumer Price Index (CPI) was pushed up by housing which drove more than half of the monthly growth, the Department of Labor said. Food prices rose just 0.2 percent between November and December
CNBC’s Jim Cramer told the station’s Squawk On the Street: ‘The reason I am not that phased because I am not in the camp that says they need to do anything in March.
‘Jay Powell said the worst thing they can do is flip flop. He has said the Fed is data dependent and, if you are, then you don’t move that fast.’
Excluding volatile food and energy costs, so-called core prices rose just 0.3 percent month over month, unchanged from November’s increase.
Core prices were up 3.9 percent from a year earlier, down a tick from November’s 4 percent year-over-year gain.
Economists pay particular attention to core prices because, by excluding costs that typically jump around from month to month, they are seen as a better guide to the likely path of inflation.
In all, inflation has cooled more or less steadily since hitting a four-decade high of 9.1 percent in June 2022.
David Kelly, chief global strategist at J.P. Morgan Asset Management, told the Wall Street Journal: ‘The progress on inflation since June 2022 has been remarkable. The bottom line is that the most likely path for inflation from here is not upwards or sideways but rather down.’