With US core inflation falling to 2.6%, the Fed is not in a hurry to lower interest rates at the beginning of 2025.
The US core CPI for December rose less than expected, reaching 2.6%. However, the persistence of rising housing and food costs may cause the Fed to delay interest rate cuts until mid-year.
According to a report from the U.S. Department of Labor on January 13, the core consumer price index (CPI) for December – a measure excluding food and energy prices – rose only 0.2% from the previous month and 2.6% year-on-year in 2024. Both increases were 0.1 percentage points lower than analysts' expectations, suggesting that price pressures are gradually easing.
Trends in key inflation indicators
The overall CPI index recorded a 0.3% increase this month and a 2.7% increase year-on-year, closely following forecasts from economists. Although the figures are gradually moving towards the Federal Reserve's 2% target, inflation remains high, pushing back expectations of an early interest rate cut.
Based on data from the CME FedWatch Tool, the market is currently betting that the Fed will implement two interest rate cuts this year, with the first likely to occur in June 2025. This contrasts with the wishes of President Donald Trump, who has repeatedly urged Fed Chairman Jerome Powell to aggressively cut interest rates to support growth.
Housing and food costs remain a persistent burden.
The main reason inflation has not yet subsided is due to housing costs. This group increased by 0.4% in December and by 3.2% compared to the same period last year. Notably, housing accounts for more than one-third of the overall CPI basket, therefore fluctuations in this segment have a direct impact on the direction of monetary policy.
In addition, price levels across other commodity groups also show stability:
- Food:Egg prices rose 0.7% in December, despite a sharp 8.2% drop from the previous month and a 21% decrease compared to the same period last year.
- Energy:Prices increased by 0.3% this month, with gasoline prices recording corresponding decreases of 0.5% and 3.4% compared to the same period last year.
- Service:Entertainment, airline tickets, and healthcare continue to experience price increases.
The Fed is expected to remain inactive in the short term.
Analysts believe the Fed may keep interest rates unchanged in the first half of 2025 to further assess the impact of previous policy adjustments. Morgan Stanley Wealth Management strategist Ellen Zentner argues that this inflation report does not provide a compelling reason for the Fed to cut interest rates in January.
The first monetary policy meeting of 2025 is scheduled for January 27-28. Fed officials are currently facing the dilemma of balancing the risks of a weakening labor market with the potential for renewed inflation stemming from the Trump administration's new tariff policies. However, most officials believe that the impact of tariffs on inflation will only be temporary.
