In December, inflation continued to climb for the third consecutive month, fueled by increasing food and energy prices, reaching its highest level in five months. This trend indicates a halt in the positive momentum seen in price reductions earlier last spring and summer.

However, a key indicator of inflation moderated, suggesting that overall inflation might start to decline again in the first half of 2025. Economists warn that President-elect Donald Trump’s policies on trade and immigration could lead to higher prices later in the year.

According to the Labor Department’s consumer price index, which tracks a comprehensive range of goods and services, consumer prices rose 2.9% year-over-year as of December, up from 2.7% in November. This marks the third consecutive rise after six previous drops, bringing annual inflation to its highest point since July. Economists polled by Bloomberg had anticipated the inflation to reach 2.9%.

On a monthly basis, prices advanced by 0.4%, the largest increase since March.

Understanding Core Inflation

Core inflation, which excludes the more volatile food and energy sectors and is closely monitored by the Federal Reserve for its indication of long-term trends, saw a slight increase of 0.2% after four months of 0.3% rises. This adjustment reduced the annual core inflation rate to 3.2%, down from 3.3% over the prior three months.

Is Inflation Expected to Decrease?

After a steady decline earlier in 2024, annual inflation has largely remained stable in recent months. Service prices, such as healthcare and auto repairs, have risen due to increased labor costs and higher vehicle prices—effects stemming from the COVID-19 pandemic.

Conversely, prices for goods that had been declining as a result of resolving pandemic-induced supply chain issues have now stabilized or slightly increased as those benefits fade.

Goldman Sachs projects that wage growth and rent increases will slow down, leading to lower inflation in the coming months. Barclays predicts that by April, overall inflation will decrease to 2.3%, while core inflation will dip to 2.7%. This would be significantly lower than the 40-year peak of 9.1% seen in mid-2022, though still slightly above the Federal Reserve’s target of 2%.

Nevertheless, by the year’s end, both Barclays and Goldman foresee that Trump’s proposed tariffs on certain imports, particularly from China, will likely drive inflation back up. Additionally, Trump’s plans to deport millions of undocumented immigrants may lead to heightened labor costs, typically passed on to consumers through higher prices.

Barclays anticipates that inflation will rise again to 2.8% by the following December, with core inflation increasing to 3.1%.

What Rate Cuts Can We Expect in 2025?

The higher-than-expected inflation figures in December may reinforce the Federal Reserve’s decision to hold off on rate cuts in January and to adopt a slower approach to reductions this year.

Since September, the central bank has decreased its primary interest rate by one percentage point as part of a strategy to normalize rates following a period of declining inflation during the initial nine months of last year.

However, due to persistent inflation and Trump’s commitment to implement substantial import tariffs and detain a significant number of immigrants, Federal Reserve officials have revised their forecast for the year from four quarter-point cuts to just two.

Many economists are now banking on even fewer rate reductions following a report released Friday, indicating that 256,000 new jobs were created in December. A robust labor market could reignite inflation, limiting the rationale for the Fed to lower rates further to stimulate the economy.

Kathy Bostjancic, Chief Economist at Nationwide, stated in a correspondence to clients, “With inflation remaining high, a strong job market, and potential changes in tariff and immigration policies that could elevate prices, the Fed will likely proceed cautiously and remain patient about further rate cuts.” She anticipates the Fed to maintain current rates throughout the first half of the year.

However, Samuel Tombs of Pantheon Macroeconomics expects the Fed to consider rate cuts again in March, predicting a decline in the inflation measure they monitor most closely over the next couple of months.

Will Gas Prices Decrease?

According to Barclays, gasoline prices dipped by 1.5% in December but experienced a seasonal adjusted rise of 4.4% due to typical winter price declines. Oil prices have recently increased due to concerns about supply issues in Russia and Iran and anticipation of recovering demand from China.

Regular unleaded gasoline averaged $3.14 per gallon in December, down from $3.17 in November, as reported by the Energy Department.

Are Food Prices Still Rising?

In December, grocery prices increased by 0.3%, a slight moderation compared to a notable 0.5% rise in November.

Egg prices soared by 3.2% last month following an 8.2% increase the month before, driven by a prolonged bird flu outbreak lasting two years. Other food staples also saw price hikes, including bacon (2.3%), breakfast cereal (0.8%), rice (1.2%), bread (0.7%), and chicken (0.3%).

However, the prices of uncooked ground beef fell by 0.3%, and fresh fish and seafood decreased by 0.2%.

Dining out also became slightly more expensive due to rising labor costs, increasing by 0.3% for the second consecutive month.

Will Rent Increases Slow Down?

Rent prices climbed slightly by 0.3%, following a mere 0.2% increase in November, which had been the smallest monthly rise since July 2021. Nonetheless, this reflects a slowdown from the significant increases in earlier years. Consequently, the annual rent increase is now at 4.3%, down from 4.4%, the slowest since February 2022. The reduction in rental prices for new leases is finally affecting rates for current tenants.

This decrease is a welcome sign, as housing costs have been a primary contributor to inflation, accounting for 37% of last month’s price increases.

Other services have also seen notable price increases. Car insurance rates rose by 0.4% following more moderate gains in prior months, resulting in an 11.3% year-over-year increase. Additionally, airline fares increased by 3.9%, which Pantheon Macroeconomics attributed to a spike in holiday travel demand.

Medical service costs rose by 0.2%, though this is less than recent surges, while hotel rates dropped by 1%, slightly reversing a 3.2% increase from the previous month.

Certain goods prices have also stabilized. Appliance prices fell by 2.9%, furniture costs dipped nearly 1%, and clothing price increases were limited to just 0.1%.

Used car prices increased by 1.2%, and new vehicle prices climbed by 0.5%, but Tombs noted that these upticks likely resulted from Americans replacing vehicles damaged by two hurricanes in the Southeast during the fall.

Contributing: Reuters

(This story was updated to include new data.)