- The annual inflation rate rose to 3.4 percent in December, exceeding analysts' forecasts
- Experts had expected inflation to rise slightly to 3.2 percent
- The news has sparked fears that the Federal Reserve could avert interest rate cuts
Inflation rose to 3.4 percent in December, exceeding economists' forecasts. That sparked fears that the Federal Reserve could prevent interest rate cuts this year.
The consumer price index (CPI) was boosted by housing construction, which accounted for more than half of the monthly growth, the Labor Department said. Food prices rose by just 0.2 percent between November and December.
Overall prices rose 0.3 percent compared to November, when annual inflation was 3.1 percent, and remain well above the Fed's 2 percent target.
Economists had predicted that the annual inflation rate would rise slightly by 0.1 percent to 3.2 percent at the end of the year. The higher-than-expected increase means an expected rate cut in March is now unlikely, experts said.
Market reaction to the news was minimal on Thursday morning. The S&P 500 was flat after the release, having risen around 0.2 percent before the figures were released.
Inflation rose to 3.4 percent in December, exceeding economists' forecasts. That sparked fears that the Federal Reserve could prevent interest rate hikes this year
Inflation needs to cool to pave the way for interest rate cuts this year after the Fed raised rates to a 22-year high of 5.25 to 5.5 percent.
The Fed's next meeting is Jan. 31, but officials were widely expected to vote to keep interest rates at current levels that day.
Instead, economists had pinned all their hopes on the following meeting on March 20th. Traders had priced in a more than 70 percent chance that the central bank would announce 25 basis point interest rate cuts that day.
However, experts today agreed with the latest data but that plan is at risk.
Brian Coulton, chief economist at Fitch Ratings, told Bloomberg: “I think the message from this press release is that core inflation is proving stubborn.”
“This will give the Fed cause for caution and it is unlikely that it will cut rates as quickly as markets currently expect.”
Similarly, Greg McBridge, chief financial analyst at Bankrate, said: “Inflation, as measured by the Consumer Price Index, is moving in the right direction, but this release should shatter any ideas investors have about a Fed rate cut in March.”
The consumer price index (CPI) was boosted by housing construction, which accounted for more than half of the monthly growth, the Labor Department said. Food prices rose by just 0.2 percent between November and December
But many analysts called for calm on Thursday morning.
CNBC's Jim Cramer told the network's “Squawk On the Street,” “The reason I'm not so undecided is because I'm not in the group that says they have to do something in March.”
“Jay Powell said the worst thing they could do was flip-flop. He said the Fed is dependent on data, and if so, they won't act so quickly.'
Excluding fluctuating food and energy costs, so-called core prices rose just 0.3 percent month-on-month, remaining unchanged from the November increase.
Core prices rose 3.9 percent year-on-year, a tick less than in November when they rose 4 percent year-on-year.
Economists pay particular attention to core prices because they are seen as a better guide to the likely path of inflation by excluding costs that typically fluctuate from month to month.
And overall, inflation has cooled more or less steadily since reaching a four-decade high of 9.1 percent in June 2022.