By Lucia Mutikani
Washington — US consumer prices increased in December, lifted by higher costs for rent and food as some of the distortions related to the government shutdown that had artificially lowered inflation in November unwound, cementing expectations the Federal Reserve would leave interest rates unchanged this month.
Yet rate cuts this year remain on the table, with the report from the Labor Department on Tuesday showing moderate underlying inflation pressures last month. Economists said that suggested the import tariffs pass-through to prices was slowing.
Nonetheless, expensive food — prices increased the most in more than three years — and rents underscored the affordability crisis, which economists partly blame on President Donald Trump’s policies, including sweeping import tariffs.
Trump has made a flurry of proposals to lower the cost of living, including banning institutional investors from buying single-family homes. He also instructed the Federal Housing Finance Agency — which oversees mortgage finance giants Fannie Mae and Freddie Mac — to buy $200bn of bonds issued by the two companies in a bid to bring down mortgage rates.
High inflation has eroded Trump’s approval ratings and will be a factor this year as he and fellow Republicans battle to retain control of the US Congress.
Government shutdown
“Distortions caused by the government shutdown have made the inflation data harder to interpret, but the recent run of figures suggests inflation has peaked,” said Michael Pearce, chief US economist at Oxford Economics.
“We expect [Federal Reserve] officials are happy to remain on extended pause as they wait and see the impact of their recent string of rate cuts, but with inflation fears fading, officials will feel freer to respond to downside risks to the labour market should conditions deteriorate.”
The consumer price index (CPI) rose 0.3% last month, the labour department’s Bureau of Labour Statistics (BLS) said. A 0.4% increase in the cost of shelter, which includes rents, was the main driver of the rise in the CPI.
Food prices surged 0.7%, the biggest gain since October 2022. There were notable increases in the prices of fruits and vegetables as well as dairy and related products. Beef prices, which have angered many Americans, rose 1.0%, with steaks soaring 3.1%. Coffee prices rose 1.9%, reflecting tariffs, but egg prices fell 8.2%.
The cost of food at restaurants and other outlets rose 0.7%.
Energy prices increased 0.3% as a 4.4% surge in natural gas prices offset a 0.5% decline in petrol, though electricity prices eased 0.1%. In the 12 months through December, the CPI advanced 2.7%, matching November’s gain. The increase was in line with economists’ expectations.
The BLS estimated the CPI rose 0.2% from September to November. The 43-day shutdown prevented the collection of prices for October, resulting in the bureau using a carry-forward method to impute data, especially for rents, to compile November’s CPI report.
While prices for November were collected, that was not until the second half of the month when retailers were offering holiday-season discounts. The carry-forward imputation method treated October prices as unchanged.
US Treasury yields fell on the data, while the dollar edged up against a basket of currencies.
Moderate underlying inflation
Excluding the volatile food and energy components, the CPI increased 0.2% in December. Despite the moderate rise in the so-called core CPI, some details of its components were strong.
Owners’ equivalent rent increased 0.3%, while the cost of hotel and motel rooms jumped 2.9%. Airline fares soared 5.2% and apparel rose 0.6%. Healthcare costs advanced 0.4%. But prices for used cars and trucks dropped 1.1% and the cost of household furnishings and operations eased 0.5%.
The core CPI increased 2.6% year on year in December after rising by the same margin in November. The BLS estimated the core CPI climbed 0.2% from September to November.
The Federal Reserve tracks the personal consumption expenditures price indices for its 2% inflation target.
The pick-up in consumer inflation came after news last week that the unemployment rate dipped in December even as job growth was tepid. The Fed is expected to keep its benchmark overnight interest rate in the 3.50%-3.75% range at its January 27-28 meeting.
An escalation in tensions between Fed chair Jerome Powell and Trump has left most economists not expecting a rate cut before Powell’s term ends in May. The Trump administration has opened a criminal investigation into Powell, which the Fed chief called a “pretext” to influence rates.
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