US Inflation Rises for 3rd Straight Month, Driven by Higher Energy, Shelter Costs

The drop in core inflation relieves investors.

People shop at a grocery store in New York City on Aug. 14, 2024. Spencer Platt/Getty Images

The U.S. annual inflation rate increased for the third straight month in December 2024, finishing the year slightly below 3 percent as energy and shelter drove much of the month’s jump.

According to the Bureau of Labor Statistics, the annual inflation rate rose to 2.9 percent last month from 2.7 percent in November 2024.

Estimates collected by FactSet Insights suggested that the rise in the consumer price index (CPI) would be 2.8 percent. The latest reading is below the trailing 12-month average of 3 percent.

Monthly inflation was 0.4 percent, higher than the consensus estimate of 0.3 percent.

Core inflation, which excludes the volatile energy and food categories, slowed to 3.2 percent from 3.3 percent. This came in below economists’ projections of 3.3 percent.

The core CPI ticked up by 0.2 percent, in line with market forecasts.

The index for energy advanced by 2.6 percent, representing more than 40 percent of the monthly CPI increase. The gasoline index surged by 4.4 percent, while utility-piped gas service advanced by 2.4 percent.

Crude oil and natural gas prices have experienced significant upward momentum over the past month, fueled by supply concerns, frigid temperatures, and the administration’s sweeping sanctions on Russian energy.

Meanwhile, shelter costs rose by 0.3 percent monthly and remained elevated at an annualized pace of 4.6 percent.

Economists and monetary policymakers expected shelter inflation to decline sharply by now. But while the shelter index remains high, it has been showing signs of easing.

The CPI report emphasized broad-based inflation pressures, with a wide array of goods and services climbing last month, including airline fares (3.9 percent), eggs (3.2 percent), ham (1.4 percent), used cars and trucks (1.2 percent), transportation services (0.5 percent), and motor vehicle insurance (0.4 percent).

The Federal Reserve’s preferred personal consumption expenditure price index will be the next major inflation report later this month.

Market Reaction

The financial markets reacted positively following the December 2024 inflation report, rallying ahead of the opening bell. Investors were encouraged by the decrease in core inflation, which is closely monitored by the U.S. central bank.

The tech-heavy Nasdaq Composite Index led the way, soaring by 1.5 percent. The blue-chip Dow Jones Industrial Average and the S&P 500 each spiked by about 1.3 percent.

U.S. Treasury yields slumped, with the benchmark 10-year yield sinking to 4.7 percent. The 20-year yield slumped below 5 percent, while the 30-year struggled to hold 4.92 percent.

The U.S. dollar index, a measure of the greenback against a weighted basket of currencies, plummeted to below 109.00.

Still, despite the surprise drop in core inflation, the jump in headline inflation could support the case of a pause in interest rate cuts, according to Giuseppe Sette, president of Reflexivity.

“A small blip up in CPI supports the message from the job number of a few days ago: rate cuts are off-season, at least for a while,” Sette said in a note emailed to The Epoch Times.

Greg McBride, chief financial analyst at Bankrate, said that for the Fed to lower interest rates, inflation needs to come down.

“And it’s not,” McBride said in a statement to The Epoch Times. "The progress toward 2% inflation stalled out late in 2024 and we’re in a waiting game to see if inflation eases, stagnates, or resurges from here.

“There isn’t much the Federal Reserve can latch onto at this point and feel that any substantive improvement in inflation is around the corner.”

Inflation Ahead

The Cleveland Federal Reserve’s Inflation Nowcasting model suggests that inflation’s recent uptick may have peaked. Next month, the annual inflation rate could be 2.8 percent.

Market watchers have been expecting an inflation revival as various reports indicate renewed price pressures.

The Institute for Supply Management’s Services Purchasing Managers’ Index—a monthly survey of industry executives to measure the sector’s prevailing economic direction—revealed a reacceleration of prices.

Likewise, the group’s manufacturing alternative highlighted a modest price jump.

A shopping cart in a supermarket in New York City on June 10, 2022. Andrew Kelly/Reuters

“These higher costs are frequently passed on to consumers, perpetuating inflationary trends even as growth moderates in some areas,” Jim Nelson, portfolio manager at Euro Pacific Asset Management, said in a note. “This persistence of inflation suggests that underlying pressures in the economy remain unresolved, with price stability proving elusive.”

According to the January University of Michigan Consumer Sentiment Index, consumers expect inflation to stay high over the next year despite a new U.S. administration.

The monthly survey showed that consumers believe that prices will increase by 3.3 percent this year, up from 2.8 percent in the December 2024 poll. This is the highest level since May 2024.

Long-term inflation expectations also rose from 3 percent to 3.3 percent, the highest level since 2008.

Investors were relieved on Jan. 14 when the producer price index (PPI)—which measures the prices that businesses pay for goods and services—showed a slower-than-expected increase.

In December 2024, producer prices rose by 0.2 percent monthly and by 3.3 percent year over year. Core PPI inflation remained unchanged at zero percent monthly and 3.5 percent year over year.

Core and services inflation levels have been central to the stickiness observed in recent months.

These developments could make the Federal Reserve’s task challenging as policymakers try to gauge whether inflation is rebounding.

Federal Reserve Chair Jerome Powell told reporters at last month’s post-meeting news conference that inflation risks were the primary reason for officials revising their interest rate forecasts.

“As we think about further cuts, we’re going to be looking for progress on inflation,” Powell said. “We have been moving sideways on 12-month inflation.”

According to the updated December 2024 Summary of Economic Projections, the Fed expects two quarter-point rate cuts this year, down from the initial estimate of four.

The financial markets are not penciling in the next 25-basis-point rate cut until June.