Inflation in the United States accelerated more sharply than economists had predicted in December, with the latest figures intensifying public anxiety about the economic impact of tariffs and presenting a fresh challenge for policymakers.
December's Inflation Surprise
The key Consumer Price Index (CPI) rose by 2.7 percent in December compared to the same month a year earlier. This exceeded the forecast of a 2.6 percent increase that economists, surveyed by data provider FactSet, had anticipated. On a monthly basis, prices climbed by 0.3 percent, a pace that is faster than what aligns with the Federal Reserve's long-term target of 2 percent.
Perhaps more concerning for the central bank is the rise in core inflation, which strips out volatile food and energy prices. This measure, often seen as a better indicator of underlying price pressures, is estimated to have reached approximately 2.8 percent year-on-year. This marks an increase from the 2.6 percent core rate recorded in November, where headline inflation was also 2.7 percent.
Data Distortions and Political Pressure
The latest figures were particularly difficult to forecast due to the disruptive effects of last autumn's six-week federal government shutdown, which suspended the collection of the price data used to calculate the inflation rate. Some economists had expected a larger rebound in December as data-gathering operations returned to normal.
Analysts note that the November data may have been artificially suppressed. Most prices for that month were collected after the government reopened, coinciding with the start of holiday discounting. Furthermore, because rental data wasn't fully gathered in October, estimated figures were used, which may have pushed reported prices lower.
Inflation remains a potent political issue. President Donald Trump has introduced measures aimed at curbing prices, while both he and former President Joe Biden have struggled to fully address public frustration. Everyday costs for essentials like groceries, rent, and clothing remain significantly higher than before the pandemic, with grocery prices up about 25 percent.
Federal Reserve's Delicate Balancing Act
The Federal Reserve is now walking a tightrope. Its goal is to contain inflation by maintaining relatively high interest rates, while also being prepared to cut them to support employment if unemployment rises. With inflation stubbornly above its 2 percent target, the Fed is exercising caution regarding further rate reductions.
After implementing a slight cut in December, Chair Jerome Powell indicated that policymakers would adopt a wait-and-see approach to observe how the economy develops. Officials are divided on whether to cut rates again or hold them near the current level of 3.6 percent. President Trump has publicly criticised the Fed for not cutting more aggressively, arguing it would reduce borrowing costs, even though mortgage rates are primarily set by market forces.
Tensions between the White House and the central bank were further heightened recently after the Justice Department subpoenaed the Fed regarding Powell's testimony on a building renovation. Powell has dismissed the allegations as a pretext for the administration to exert greater control over the institution.
While inflation has fallen dramatically from its peak of 9.1 percent in June 2022, it has hovered near 3 percent since late 2023. The December data confirms that the path back to the Fed's target remains bumpy and uncertain, with external factors like trade policy adding to the complexity.
