In December, U.S. consumer prices gained new vigor, which sparked worries about the Fed’s capacity to maintain its gains against inflation. The Fed’s target inflation rate has stabilized, posing a growing challenge to policymakers in 2025.
The Consumer Price Index (CPI) rose by 0.4% from November and 2.9% compared to a year earlier, according to the US Labour Department. While the data reveals modest acceleration, “core” inflation—which excludes volatile food and energy prices—offers some encouragement, ticking down to 3.2% annually after three months at 3.3%.
December Data Highlights Slow Progress Against Inflation
Despite significant cooling from its 2022 peak of over 9%, inflation has stubbornly plateaued. Economists note that progress essentially stalled throughout 2024, underscoring the challenges of fully normalising price growth.
“When you step back and look at the overall state of inflation, we’re not really going anywhere,” said Sarah House, senior economist at Wells Fargo. Although there has been progress, House described the pace as “disappointing.”
Even if the price growth is still high, the US labor market has surprised everyone by showing that it is still strong. Fears that aggressive interest rate changes might cause widespread layoffs or jeopardize the stability of the economy as a whole were allayed when December’s job growth surpassed projections.
The Federal Reserve is now indicating a halt to additional rate cuts after lowering rates three times in a row in 2024. Analysts widely expect the central bank to hold rates steady at its upcoming meeting. Aditya Bhave, an economist at Bank of America, suggested that the Fed may refrain from additional cuts altogether in 2025, citing stable employment and persistent inflation as key factors.
Uncertainty Looms with Incoming Fiscal Policies
Complicating the Federal Reserve’s policy outlook are potential fiscal measures from President-elect Donald Trump’s administration. Proposals to impose steep tariffs, restrict immigration, and introduce tax cuts could exert upward pressure on prices, adding a layer of unpredictability to inflation dynamics.
Economists have warned that such policies may fuel price growth, though the precise impact remains uncertain. “The Fed has the luxury of a little bit of time to wait for President Trump to take office and see exactly what happens,” said James Egelhof, chief US economist at BNP Paribas.
Adding to the mixed signals, wholesale prices rose more slowly in December, providing a glimmer of hope for gradual price stabilisation. However, Fed officials remain cautious, balancing inflation management with economic resilience.
As the central bank navigates this complex environment, its immediate focus is likely to remain on evaluating new fiscal policies and their implications for inflation, ensuring decisions are grounded in both market data and geopolitical realities.
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