Inflation Remained Elevated in December, Reinforcing Wait-and-See Approach by Federal Reserve

A recent report from the Federal Reserve's preferred inflation gauge, the "core" Personal Consumption Expenditures (PCE) index, indicates that price growth remained persistent in December 2024. The index, which excludes volatile food and energy costs, rose by 2.8% year-over-year, unchanged from the November figure.

On a monthly basis, core PCE increased by 0.2%, exceeding the consensus estimate of 0.1%. These figures are in line with expectations, suggesting that inflation is not experiencing significant fluctuations.

The data aligns with the Federal Reserve's decision to maintain interest rates on hold this week, following three consecutive cuts in late 2024. The central bank is adopting a cautious stance, monitoring inflation while also considering policy uncertainties from the Trump administration.

Fed officials have repeatedly expressed concern about persistent inflation and its potential impact from proposed tariffs, immigration reforms, and tax cuts. As a result, the number of expected rate cuts for 2025 has been reduced from four to two.

Fed governor Michelle Bowman emphasized her preference for gradual adjustments to the target range. She noted that inflation is likely to decline over the year but highlighted the potential for "bumpy" progress.

Bowman remains concerned about the risks to inflation, particularly with near-full employment levels. Some analysts believe that the Fed has completed its cutting cycle for the year.

Fed Chair Jerome Powell previously stated that further rate adjustments would be contingent on additional progress in reducing inflation. He emphasized the bank's willingness to take a measured approach.

Bowman expressed concern that easing financial conditions over the past year may have hindered progress in curbing inflation. She is also monitoring the rise in longer-term Treasury yields, which could indicate market fears about potential prolonged high interest rates.

The Fed's slower approach allows for a clearer understanding of the Trump administration's policies and their economic impact. Enhanced clarity about these policies and their implementation is crucial, Bowman concluded.