US inflation picked up in December, though underlying price pressures ease

WASHINGTON (AP) — U.S. inflation picked up last month as prices rose for gas, eggs, and used cars, yet underlying price pressures also showed signs of easing a bit.

Wednesday’s report from the Labor Department showed that the consumer price index rose 2.9% in December from a year ago, the highest since July, up from 2.7% in November. It was the third straight increase after inflation fell to a 3 1/2 year low of 2.4% in September.

Yet excluding the volatile food and energy categories, so-called core inflation declined to 3.2%, after remaining stuck at 3.3% for three months in a row.

The slowdown in core price increases was greeted with relief on Wall Street, with Dow Jones futures pricing surging nearly 700 points on the report's release. Many economists and investors are worried that inflation has gotten stuck above the Fed’s 2% target, after a steady decline in prices in 2023 and for much of last year.

Such concerns have sent interest rates on Treasury securities higher, which has also pushed up borrowing costs for mortgages, cars, and credit cards, even as the Fed has cut its key rate.

Still, the increase in overall consumer prices underscores that inflation remains sticky, even as the threat of potentially inflationary policies from the Trump administration, such as universal tariffs and mass deportations of unauthorized migrants, looms.

Egg prices rose last month, though not as much as many economists feared, moving up 3.2% just in December. An outbreak of avian flu is decimating many chicken flocks, reducing egg supply. Gas prices increased 4.4%, the report said.

The national average price for a gallon of gasoline on Wednesday was $3.09, up 7 cents from last month, but just 2 cents higher than last year at this time.

On a monthly basis, consumer prices rose 0.4% in December, the biggest increase since last March. Core prices climbed just 0.2%, after four straight months of 0.3% increases, a positive sign that some price pressures could be cooling a bit.

Last Friday's unexpectedly strong jobs report caused stock and bond prices to plunge on fears that a healthy economy could keep inflation elevated, preventing the Fed from cutting further.

On Tuesday, Trump said that he would create the “External Revenue Service” to collect tariffs, suggesting he expects many duties to ultimately be imposed, even as he has also said he intends to use them as bargaining chips. During the campaign, he promised to impose up to 20% duties on all imports and as high as 60% tariffs on goods from China.

Last week, minutes from the Fed's December meeting showed that economists at the central bank expect inflation to remain about the same this year as in 2024, pushed up a bit by higher tariffs.

Fed Chair Jerome Powell has said the central bank will keep its key interest rate elevated until inflation is back to 2%. As a result, Wall Street investors expect the Fed to cut its key rate just a single time this year, from its current level of 4.3%, according to futures prices.

Other borrowing costs remain high, in part because of expectations for higher inflation and few Fed rate cuts. Mortgage rates, which are strongly influenced by the yield on the 10-year Treasury note, rose for the fourth straight time last week to 6.9%, far above the pandemic-era lows of below 3%.

With the job market resilient — the unemployment rate ticked down to a low 4.1% last month — consumers are able to keep spending and drive growth. If demand exceeds what companies can produce, however, that could fuel further inflation.

Earlier this month, several prominent economists, including former Federal Reserve Chair Ben Bernanke, agreed that the tariffs Trump will ultimately impose will probably only have minor effects on inflation. The issue was discussed at the American Economic Association's annual meeting in San Francisco.

Jason Furman, a top economic adviser during the Obama administration, said at the conference that the duties may lift the annual inflation rate by just several tenths of a percentage point. But he added that even an increase of that size could be enough to affect the Fed's rate decisions.

“You are in a world where the Trump policies are more like tenths, than something cataclysmic," he said Jan. 4. "But I think we’re also in a world where the direction of whether rates are staying the same, going down, or going up, depends on those tenths.”