Inflation in the U.S. reached its highest level since the summer in December, according to data released by the Bureau of Labor Statistics. The report underscores the ongoing pressure of elevated prices on consumers, although economists had anticipated a temporary inflation bump.
Key Inflation Figures for December
• Headline Inflation: The consumer price index (CPI), a key measure of inflation, showed a 2.9% increase in December compared to the same month a year earlier. This is the highest annual inflation rate since July 2023, which also stood at 2.9%.
• Monthly Change: The CPI rose by 0.4% from November to December on a seasonally adjusted basis, exceeding the 0.3% forecast by economists surveyed by Dow Jones.
The 2.9% annual inflation reading was in line with economists’ expectations, but it still signals persistent inflationary pressures on goods and services in the U.S.
Core Inflation Remains Elevated
Core inflation, which excludes volatile categories like food and energy, was reported at 3.2% in December, slightly better than analysts’ forecast of 3.3%. While this marks a slight improvement over previous months, core inflation remains well above the Federal Reserve’s 2% long-term target, indicating that underlying inflationary pressures persist.
Gas Prices Contribute to the Inflation Bump
One of the primary drivers of the inflation surge in December was energy prices, particularly gasoline. Despite a trend of declining gas prices over the past year, the December CPI report showed a notable 4.4% month-over-month rise in gasoline prices. This was largely attributed to seasonal adjustments in the CPI, which accounted for the typically lower gas prices during December.
While nominally, gas prices dropped by 1.1% from November to December, the CPI’s seasonally adjusted figures revealed a sharper increase. This was partly driven by rising crude oil prices, with U.S. benchmark West Texas Intermediate (WTI) rising by 5% during the month. Market anticipation of potential sanctions on Iranian oil under President-elect Donald Trump also contributed to higher crude oil prices, which in turn affected gasoline prices.
Economic Context and Backdrop
This higher-than-expected inflation reading reflects the broader economic recovery post-pandemic. Inflation surged beginning in 2021 as the economy rebounded from COVID-19 lockdowns, reaching a 41-year high of over 9% in 2022. Since then, inflation has been gradually decreasing but still remains a persistent issue.
The Federal Reserve has responded by aggressively raising interest rates to their highest levels since the mid-2000s, aiming to curb inflation. These actions have made borrowing more expensive, impacting everything from mortgages to corporate loans. However, despite the Fed’s actions, inflation has remained stubbornly high, with some economists predicting slower progress in controlling it.
November marked the first month since March when inflation ticked upward, signaling a potential stall in the progress made to reduce prices. Economists from Goldman Sachs and Bank of America have warned that inflation may persist due to upcoming changes in trade, fiscal, and immigration policies.
Looking Ahead: Inflationary Pressures Persist
Goldman Sachs economists forecast that core CPI inflation will decrease to 2.7% by the end of 2025, which would represent the lowest rate since March 2021. However, this rate is still higher than the levels observed from 2007 to 2021, suggesting that consumers may face sustained higher prices over the coming years.
Additionally, as President Joe Biden’s term in office nears its midpoint, inflation has become a key issue overshadowing the positive effects of job growth and a strong stock market. From December 2020 to December 2024, the CPI rose by 21.3%, equating to an annualized inflation rate of 5.3%. This figure has been one of the most significant challenges facing Biden’s economic performance.
As inflation continues to impact U.S. consumers, December’s CPI data highlights the persistence of higher prices, particularly in energy sectors like gasoline. With core inflation remaining elevated and economists predicting slow progress in reducing it, U.S. households may continue to feel the effects of inflationary pressures into 2025. The Federal Reserve’s actions, coupled with geopolitical and policy changes, will likely shape the trajectory of inflation in the coming years.
BY – KARTIK
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