In a rare moment of moderation, US consumer prices rose less than expected in December, providing much-needed relief after months of stubborn inflation. This development has prompted the Federal Reserve to pause rate cuts, signalling a cautious approach to future monetary policy.

According to data from the Bureau of Labour Statistics, the so-called core Consumer Price Index (CPI), which excludes the volatile categories of food and energy, rose by a modest 0.2% after four consecutive months of 0.3% increases. Declines in hotel prices, slower growth in medical services, and relatively tame rent hikes helped keep December’s numbers in check.

While the easing CPI figures are welcome, they hardly amount to a victory lap for the Fed. After months of elevated inflation, policymakers remain wary, needing a consistent string of moderate reports to feel reassured. Lingering price pressures have spooked global bond markets and raised concerns that the Fed may have been too hasty in relaxing monetary policy late last year.

Add last week’s surprisingly strong jobs report to the mix, and the Fed is widely expected to leave interest rates untouched at its meeting later this month. Futures markets suggest no further cuts are likely until later in the year.
Economists often view core CPI as a better indicator of inflation trends than the headline figure, which includes unpredictable food and energy costs. Even so, the headline CPI rose 0.4% in December, with energy accounting for more than 40% of the increase. Food prices, airfare, car prices, auto insurance, and medical costs all contributed to the inflationary mix, though goods prices, excluding food and energy, grew by a mere 0.1%.

The housing category, a dominant component of services, rose by 0.3% for the second consecutive month. However, subcategories like owner-equivalent rent and primary residence rent logged their smallest gains since 2021. Meanwhile, services inflation excluding housing and energy—a favourite Fed metric—rose just 0.2%, the slightest uptick since July.
The Fed is also monitoring the Personal Consumption Expenditures (PCE) Price Index, which gives less weight to housing costs than the CPI and is nearing the central bank’s 2% target. Wholesale inflation data published earlier in the week showed tame pricing across most categories, though airline ticket prices stood out with a notable spike.

Real wage growth, another key factor for the Fed, rose by just 1% year-on-year, the weakest pace since July. This modest figure suggests that consumer spending, the backbone of the economy, might not get a significant boost from pay raises anytime soon.

Despite the tempered inflation data, the Fed remains cautious. Recent speeches and forecasts indicate a wariness of inflationary risks and a preference for a conservative approach to rate adjustments. With upcoming reports on retail sales, inflation expectations, and the housing market still pending, the Fed’s January 28-29 meeting will likely focus on digesting this mixed economic picture.
For now, the Fed’s message is clear: inflation may have softened, but they’re not ready to let their guard down just yet.