Inflation and Interest Rates: A Tenuous Balance

Consumer prices in the U.S. rose slightly higher than expected in December, driven by energy costs, indicating persistent inflation aligning with Federal Reserve forecasts. The Fed projects fewer interest rate cuts this year, and economic resilience might complicate reaching its 2% inflation target.

Consumer prices in the United States edged up higher than anticipated in December due to rising energy costs, reflecting continuous inflationary pressures consistent with the Federal Reserve's outlook, which predicts limited interest rate cuts this year. The Bureau of Labor Statistics reported a 0.4% increase in the consumer price index (CPI) last month, following a 0.3% rise in November.

With economists forecasting a 0.3% gain and a 2.9% year-on-year increase, inflation continues to hinder progress toward the Fed's 2% target. Factors such as economic resilience, proposed tariffs on imports, and mass deportations add to inflationary concerns. Meanwhile, the incoming Trump administration's tax cut promises could further stimulate the economy.

Households' inflation expectations surged in January, wary of potential price hikes due to tariffs. Excluding food and energy, the core CPI increased by 0.2% in December. Though no rate cuts are expected at the Fed's January policy meeting, future cuts remain uncertain. Opinions vary on the likelihood of borrowing cost reductions before year's end, with forecasts ranging from two rate cuts to an easing cycle conclusion.

(With inputs from agencies.)