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The United States experienced a surge in inflation during December 2024, with the Consumer Price Index (CPI) climbing to 2.9% on an annual basis. This marks the highest point since July of the same year, indicating a resurgence in inflationary pressures. The increase was driven by rising prices for various goods and services, including gasoline, eggs, and used cars. This upward trend in inflation raises significant concerns about the economic outlook and the Federal Reserve's (Fed) monetary policy decisions. The monthly CPI increase of 0.4% further underscores the persistent inflationary pressures within the US economy. This data contrasts with the November CPI figure of 2.7%, highlighting a concerning acceleration in price growth.
A closer examination of the data reveals that even when excluding volatile food and energy components, the core CPI still experienced a notable rise. The core CPI, which is considered a better indicator of underlying inflationary trends, increased by 0.2% in December. This follows four consecutive months of 0.3% increases, indicating a persistent upward trend in core inflation. The annual core CPI reached 3.2% in December, slightly lower than the 3.3% recorded in November, yet still significant enough to maintain concerns about inflation. This persistent core inflation raises questions about the effectiveness of the Fed’s previous interest rate cuts and suggests that further measures may be necessary to curb rising prices.
The recent inflation data has significant implications for the Federal Reserve's monetary policy. The latest figures strengthen the argument that the Fed's interest rate cutting cycle is far from over. Market participants are expressing considerable anxiety due to the potential impact of new tariffs, a possibility raised by the re-election of President Trump. These tariffs could potentially exacerbate inflation, thereby limiting the Fed’s ability to significantly lower interest rates. This creates a challenging scenario for the central bank, as it attempts to balance the need to combat inflation with the need to support economic growth. The differing views of prominent financial institutions further highlight the uncertainty surrounding the Fed's future actions. Goldman Sachs projects two rate cuts this year, in June and December, while Bank of America Securities believes the easing cycle is already complete. This divergence in forecasts underscores the complexity of the current economic climate and the difficulty in accurately predicting the Fed's response.
The Fed's monetary policy adjustments over the past year provide crucial context for understanding the current situation. Beginning in September of the previous year, the Fed initiated a series of interest rate reductions, lowering its benchmark overnight rate by 100 basis points to the current 4.25% - 4.50% range. However, the December rate cut also saw a revision in projections for 2025 rate cuts, reducing the forecast from four to two cuts. This shift in projections reflects the evolving assessment of the inflation outlook and the Fed's commitment to price stability. The significant rate hikes implemented between March 2022 and July 2023, totaling 5.25 percentage points, underscore the aggressive measures undertaken previously to combat rapid inflation. The current situation requires a careful balancing act by the Fed, weighing the potential risks of inflation against the need to avert a recession.
The financial markets reacted swiftly to the release of the December inflation data. US stocks rallied on Wednesday, with the Dow Jones Industrial Average rising 0.96%, the S&P 500 increasing by 1.07%, and the Nasdaq Composite experiencing a 1.61% gain. This positive market response reflects investor optimism that the Fed may continue its rate-cutting strategy, boosting economic growth. Meanwhile, gold prices also saw a rise, as the US dollar weakened slightly following the release of the inflation data. The softer-than-expected core inflation numbers provided some relief to investors, leading to a more positive market sentiment. The market's reaction underscores the significant influence of inflation data on investor confidence and overall market dynamics. The upcoming Federal Reserve monetary policy meeting on January 28-29 will be closely watched by market participants worldwide, as it will provide further insights into the central bank's strategy for managing inflation and supporting the economy.
Source: United States key inflation rises 2.9% in December, core CPI at 3.2%