U.S. inflation accelerated in December to 3.4%, the sharpest rise in three months. Americans paid more for housing and driving, casting doubt on investors’ bets that the Federal Reserve would soon cut interest rates.
Prices excluding food and energy rose 0.3% in December compared to the previous month. On an annual basis, this so-called core measure increased by 3.9%. Economists favour the core measure as it better indicates inflation trends.

Bureau of Labor Statistics figures showed housing, electricity, and car insurance increases. Despite this rebound, the numbers cap a year in which inflation has generally eased without causing much harm to the job market, paving the way for the Fed to lower borrowing costs this year.
Housing rent, which accounts for about a third of the overall U.S. index, contributed to more than half of its increase, rising 0.5% in December. Economists consider sustained moderation in this category essential to bring core inflation back to the Fed’s target.

Excluding housing and energy, service prices increased 0.4% compared to November, a slight slowdown from the previous month. In contrast to services, a sustained decline in goods prices has relieved consumers in recent months. Core goods prices, which exclude food and energy products, changed little after falling for six consecutive months. This price stagnation was surprising due to the unexpected increase in used car prices.

The surprisingly strong inflation figure for December shows that the path to a sustainable return to 2% inflation is fraught with challenges. Some of the disinflationary impetus for core goods, a critical factor in easing price pressures in recent months, has faded. It will likely take more than the long-anticipated rent inflation disinflation to reach the Fed’s 2% target.

Separate data showed that unemployment claims remained at historically low levels while the number of people receiving benefits fell to its lowest since October. A report on wages showed real gains of 0.8% in December compared to the previous year, extending a several-month streak in which wage growth has slightly outpaced inflation.
This data does not point towards a rate cut; quite the opposite.