US Inflation Holds Steady; Shutdown Data Creates Uncertainty
Overview
December U.S. consumer prices are expected to remain elevated, with monthly gains possibly accelerating, complicating the Federal Reserve's path. A six-week government shutdown disrupted data collection, potentially leading to unexpected figures as the process normalizes. This persistence above the Fed's 2% target signals continued caution on interest rate cuts.
Inflation Stuck Near Target
Consumer prices in the United States likely remained stubbornly elevated in December, continuing to strain household budgets. Electricity, grocery, and clothing costs may have climbed, contributing to inflation that economists predict will show a 2.6% annual increase. This figure, while down slightly from November's 2.7%, still hovers above the Federal Reserve's 2% target.
Shutdown Data Glitches
The upcoming report faces unusual uncertainty. A prolonged six-week government shutdown earlier in the fall interrupted the collection of crucial price data. Some analysts anticipate this disruption could lead to a larger-than-expected jump in December's figures as the Labor Department's data gathering returns to normal patterns. Monthly price increases are forecast at 0.3%, a pace inconsistent with sustained inflation control.
Core Inflation Ticks Up
Excluding volatile food and energy components, core prices also show a persistent upward trend. Economists forecast a 0.3% monthly rise and a 2.7% annual increase for core inflation. This represents an uptick from November's 2.6% year-over-year rate, signaling underlying price pressures that the Federal Reserve is closely monitoring.
Fed's Balancing Act
Inflation has retreated significantly from its June 2022 peak but has stubbornly lingered near 3% since late 2023. Essential goods like groceries are approximately 25% more expensive than pre-pandemic levels, fueling economic dissatisfaction. The Federal Reserve faces a delicate balance: keeping borrowing costs high to combat inflation while avoiding excessive unemployment by cutting rates.
Rate Cut Dilemma
The Federal Open Market Committee (FOMC) reduced its benchmark rate by a quarter-point in December. However, Fed Chair Jerome Powell indicated a pause in further reductions, pending a clearer view of economic evolution. The committee remains divided, with some members advocating for additional cuts and others preferring to maintain current rates to ensure inflation's descent to the 2% goal. Trump administration officials have frequently urged faster rate cuts to lower borrowing costs, but the Fed operates independently to set monetary policy based on economic data, not political pressure.
