Inflation slowed slightly in December but remained above the Fed’s target

WASHINGTON (AP) — Inflation slowed slightly last month as gas and used car prices fell, a sign that persistently high cost pressures are slowly easing.

The Labor Department said Tuesday that consumer prices rose 0.3% in December from the previous month, the same level they were in November. Excluding the volatile food and energy categories, core prices rose 0.2%, also in line with November numbers. Increases at this pace would, over time, bring inflation closer to the Fed’s 2% target.

Read more: Top central bankers support Fed Chair Powell in ‘full solidarity’ in clash with Trump

Many economists had expected inflation to jump last month as the government resumed data collection normally after a six-week shutdown last fall, so the modest increases that matched November’s numbers came as a relief. Prices of manufactured goods stabilized in December, a sign that the impact of tariffs may be beginning to fade.

“Distortions caused by the government shutdown have made inflation data more difficult to interpret, but the latest figures suggest that inflation has peaked,” Michael Pearce, chief US economist at Oxford Economics, wrote in a note to clients.

Signs that inflation may be cooling may increase the likelihood that the Fed will cut its key interest rate later this year, which could translate into lower borrowing costs for mortgages, car loans and credit cards.

However, large increases in the prices of necessities such as groceries, rent, and utilities in recent years have left many American families feeling the pressure, turning “affordability” issues into high-level political concerns. Food prices have jumped by about 25% since the outbreak of the epidemic.

President Donald Trump, shocked by last year’s election results that suggested voters were nervous about his handling of the economy, responded with a host of initiatives aimed at tackling rising costs, including a proposed ban on Wall Street firms buying homes, placing a 10% cap on credit card interest rates, and suspending many tariffs on imported goods, such as coffee, pasta and furniture.

However, grocery prices jumped 0.7% in December compared to the previous month, a sign that food costs remain high. Tuesday’s figures showed that food prices rose by 2.4% compared to last year, a greater increase than in 2024 or 2023.

Trump celebrated Tuesday’s numbers on social media, saying: “Big (low!) inflation numbers for the United States.” He also celebrated estimates that the economy expanded at a strong pace in the fourth quarter of last year: “Thank you, Mr. Tariff!”

However, tariffs would likely increase inflation by about half a percentage point, John Williams, president of the Federal Reserve Bank of New York and a key member of the Fed’s interest rate-setting committee, said in a speech on Monday.

“Tariffs aside, underlying inflation trends have been very favorable, and we see no signs of broader inflationary pressures,” Williams said. Inflation is expected to reach its peak in the first half of this year, before declining to about 2% by 2027.

Tuesday’s report is the first clear measure of inflation since September. A six-week government shutdown last fall suspended the collection of price data used to compile the inflation rate, and the government did not release a report in October, and November numbers were distorted in part by the impact of the shutdown.

Most prices in November were collected in the second half of the month, after the government reopened, when holiday sales began, which may have lowered inflation in November. Since rental prices were not fully collected in October, the agency that prepares inflation reports used placeholder estimates in November, which may have pushed prices lower, economists said.

However, Tuesday’s report noted that inflation was unchanged even with newer, more comprehensive figures. Consumer prices rose 2.7% in December, compared to a year ago, the same number as in November, while core prices rose 2.6% from a year earlier, also unchanged.

Inflation has fallen dramatically from a four-decade peak of 9.1% reached in June 2022, but has remained stubbornly close to 3% since late 2023. The cost of necessities like groceries is about 25% more expensive than before the pandemic, and other necessities like rent and clothing have become more expensive, fueling dissatisfaction with the economy that both President Donald Trump and former President Joe Biden have sought to nurture. title, although with limited success.

The Fed is struggling to balance its goal of fighting inflation by keeping borrowing costs high, while also supporting employment by cutting interest rates when unemployment worsens. As long as inflation remains above its 2% target, the Fed will likely be reluctant to cut interest rates much further.

The Fed cut its key interest rate by a quarter of a percentage point in December, but Chairman Jerome Powell, in a news conference explaining its decision, said the Fed may postpone further cuts to see how the economy develops.

Meanwhile, Trump harshly criticized the Fed for not lowering its key short-term interest rate more sharply, a move he said would lower mortgage interest rates and the government’s borrowing costs against its massive debt pile. However, the Fed does not directly control mortgage interest rates, which are determined by financial markets.

In a move that cast a pall over the Fed’s ability to fight inflation going forward, the Justice Department last Friday served the central bank with subpoenas related to Powell’s testimony before Congress in June about the $2.5 billion renovation of two Fed office buildings. Trump administration officials have suggested that Powell either lied about changes to the building or changed the plans in ways inconsistent with those approved by planning commissions.

In a blunt response, Powell said on Sunday that the allegations were “pretexts” for the White House to try to impose more control over the Fed.

“The threat of criminal charges is the result of the Fed setting interest rates based on our best assessment of what will serve the public, rather than following the president’s preferences,” Powell said.