A customer looks at eggs on a partially empty shelf at a grocery store in Lawndale, California, on January 2, 2025.
Patrick T. Fallon | AFP | Getty Images
The Bureau of Labor Statistics reported Wednesday that inflation rose in December on the back of higher energy and food prices.
The consumer price index, the bureau’s inflation indicator, rose 2.9% in the same month compared to the previous year.
This is up from November’s annual rate of 2.7% and also up from September’s recent low of 2.4%.
Economists said that while this upward trend may seem discouraging, there is evidence to suggest that inflation will resume its downward trend in 2025.
But they warn that if President-elect Donald Trump pursues policies such as tariffs and tax cuts, they could cause inflation and stall or reverse progress, depending on the scope of the measures. .
“Policy is the key here,” Joe Seidle, senior market economist at JPMorgan Private Bank, said of the trajectory of inflation.
The Consumer Price Index (CPI) measures how quickly the prices of a basket of goods and services, from haircuts to coffee to clothing to concert tickets, rise or fall.
CPI inflation has fallen significantly from its pandemic-era high of 9.1% in June 2022. But it still exceeds the Fed’s target. The central bank aims for annual interest rates of 2% over the long term.
The Fed also uses another measure of inflation, the Personal Consumption Expenditures Price Index. CPI measurements tend to be about 0.2 to 0.3 percentage points higher than PCE, Seidl said.
“We’re not that far away,” Seidle said. “We expect year-over-year rates to return to these targets by the end of this year.”
Eggs are a “swing factor”
There were some problems in December.
For example, food prices rose 0.3% from November to December, according to CPI data. Economists said a monthly increase of about 0.2% would be consistent with the Fed’s goal.
Seidl said eggs are a “variable factor” contributing to that increase.
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He said the outbreak of avian influenza, known as avian influenza, in the United States was having a “significant impact” on egg prices. The virus is highly contagious among birds, killing millions of laying hens and reducing the egg supply.
Egg prices rose 3.2% from November to December, the biggest increase among food items, according to the CPI. It is up 37% since December 2023.
Brandon Bell | Getty Images News | Getty Images
Gasoline inflation also spiked, with prices rising 4.4% from November to December, according to CPI data.
However, consumers may not realize this in the real world. The average price at the pump actually fell about 2 cents last month, from $3.03 per gallon on Dec. 2 to $3.01 per gallon on Dec. 30, according to weekly data from the Energy Information Administration.
Federal statisticians adjust inflation data for seasonal patterns. Seidl said gas prices fell less than usual in December, and the CPI recorded this lower-than-normal decline as an increase in inflation.
Gasoline prices have fallen more than 3% in the past year, according to CPI. Groceries rose 1.8%.
Shelter inflation continues to recede
On the other hand, there were some bright spots in the CPI report, including evacuation centers.
Housing inflation in December was at an annual rate of 4.6%, the lowest level since January 2022. As the largest component of the price index, it has a significant impact on the trajectory of inflation.
Economists prefer to focus on a measure known as the “core” CPI, which excludes volatile food and energy prices, to get a more accurate reading of the underlying inflation dynamics.
Things are better there. Core CPI fell to 0.2% monthly in December after being stuck at 0.3% monthly since August. The annual core inflation rate fell from 3.3% to 3.2%.
“It’s encouraging that inflation continues to be slowly and steadily subdued,” said Mark Zandi, chief economist at Moody’s.
“The only difference between where we are now and the Fed’s goal is home price growth,” he said. “It’s now decisively slowed down.”
Barring an acceleration from Trump administration policies, Zandi expects inflation could return to target levels by spring or summer.
Wage growth continued to slow in December, even as the labor market remained strong. A separate Bureau of Labor Statistics report released Friday showed average hourly wages grew at an annual rate of 3.9% last month, down from 4% in November.
This is important because labor is a major input cost for businesses, especially in service sectors such as leisure and hospitality. If wage growth spikes, companies could raise prices.
President Trump’s tariff threat may affect consumer purchases
Elsewhere, airfares rose 3.9% from November to December, following a 0.4% rise in the previous month. In the same month, used car and truck prices rose 1.2%, while new car prices rose 0.5%.
Thomas Ryan, North American economist at Capital Economics, said in a note Wednesday that the increase in new and used cars “demonstrates a continued surge in demand for replacement cars after the October hurricanes, and the “The fires will get a new impetus.”
Auto insurance prices increased by 0.4% month-on-month and by 11% from December 2023 onwards.
Economists say this is mainly due to the lag effect of high auto inflation early in the pandemic. Car prices are reflected in car insurance: As prices rise, the cost for insurance companies to replace your vehicle after a car accident also increases significantly.
At least some of the recent rise in car prices may be due to consumers rushing to buy to avoid possible tariffs imposed by the Trump administration, thereby increasing demand. Yes, Seidl said.
Recent University of Michigan Consumer Sentiment Survey data “suggests that consumers are increasingly concerned about the potential stagflationary effects of President Trump’s policy plans,” Capital Economics said. Stephen Brown, deputy chief North American economist, wrote on Friday.
“The expectation of tariffs means consumers are deciding now is a good time to buy durable goods,” he said.
