US consumer prices post largest gain in nine months; underlying inflation slowing

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Consumer price index increases 0.4% in December

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Energy goods account for more than 40% of the rise in CPI

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Consumer inflation rises 2.9% on year-on-year basis

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Core CPI gains 0.2%; up 3.2% from year ago

By Lucia Mutikani

WASHINGTON, Jan 15 (Reuters) - U.S. consumer prices increased by the most in nine months in December amid higher costs for energy goods, pointing to still-elevated inflation that aligns with the Federal Reserve's projections for fewer interest rate cuts this year.

There were, however, some hopeful signs in the fight against inflation, with the report from the Labor Department on Wednesday showing a measure of underlying price pressures subsiding after barely budging for four straight months.

That raised prospects of tame monthly readings in the inflation gauges watched by the U.S. central bank for its 2% target, and prompted financial markets to bet on a rate cut in June.

A resilient economy, the threat of broad tariffs on imported goods and mass deportations of undocumented immigrants - actions that are deemed inflationary - have led the Fed to project a shallower rate-cut path this year. President-elect Donald Trump, who will be inaugurated next week, has also pledged tax cuts, which would fuel economic growth.

"There's still more inflation-fighting work for the Fed to do, which is why it has shifted plans to more slowly reduce the still-restrictive federal funds rate," said Sal Guatieri, a senior economist at BMO Capital Markets.

"It will stand pat later this month, and may not resume cutting rates until it gets some clarity on the inflation pass-through of the tariffs that could begin rolling out next week."

The consumer price index rose 0.4% last month, the largest gain since March, after climbing 0.3% in November, the Labor Department's Bureau of Labor Statistics said. A 2.6% jump in the cost of energy products accounted for more than 40% of the increase in the CPI. Energy prices, which had risen 0.2% in November, were boosted by a 4.4% surge in the cost of gasoline.

Consumers also faced higher prices for food, which rose 0.3% after advancing 0.4% in November. Grocery store prices rose 0.3%, driven by increases in the costs of cereals and bakery products, meats, poultry and fish.

Egg prices soared 3.2%, reflecting an avian flu outbreak that has reduced supply. They increased 36.8% year-on-year.

In the 12 months through December, the CPI advanced 2.9%. That was the largest rise since July and followed a 2.7% increase in November. Some of the rise in the annual CPI rate reflected last year's low readings dropping out of the calculation. Economists polled by Reuters had forecast the CPI gaining 0.3% and rising 2.9% year-on-year.

Consumer prices increased 2.9% in 2024, slowing from 4.1% in 2023. Progress bringing inflation back to its target recently hit a snag. Consumers' inflation expectations soared in January, with households concerned that tariffs would raise goods prices.

"Inflation improved meaningfully in 2024, although it did not slow enough to meet the Fed's target or satisfy consumers weary from the big cumulative price increases of the last few years," said Bill Adams, chief economist at Comerica Bank.

FED ON HOLD

No rate cut is expected at the Fed's Jan. 28-29 policy meeting. Financial markets, however, increased bets on a rate reduction in June. The central bank launched its easing cycle in September and has lowered its benchmark overnight interest rate by 100 basis points to the current 4.25%-4.50% range.

The last reduction was in December when policymakers also projected two rate cuts this year instead of the four they had forecast in September. The policy rate was hiked by 5.25 percentage points between March 2022 and July 2023.

Stocks on Wall Street were higher, also cheered by strong bank earnings. The dollar slipped against a basket of currencies. U.S. Treasury yields fell.

Excluding the volatile food and energy components, the CPI increased 0.2% in December. The so-called core CPI had risen 0.3% for four straight months.

Still, some details of the core CPI firmed last month. Owners' equivalent rent, a measure of the amount homeowners would pay to rent or earn from renting their property, rose 0.3% after advancing 0.2% in November.

Airline fares surged 3.9%. But prices for hotel and motel rooms fell 1.0%. Healthcare costs edged up 0.1% amid marginal rises in the prices for physicians and hospital services.

There were also increases in the costs of motor vehicle insurance, recreation and education. Services prices rose 0.3% for a second consecutive month.

Used cars and trucks' prices increased 1.2%. Prescription medication prices were unchanged. New motor vehicles cost more as did apparel. Core goods prices edged up 0.1% after climbing 0.3% in November.

In the 12 months through December, the core CPI increased 3.2% after advancing 3.3% in November.

Some of the benign CPI components partially offset firmness in the PPI categories that feed into the core personal consumption expenditures price index, one of the inflation measures monitored by the Fed for monetary policy.

Economists' estimates for December core inflation ranged from 0.14% to 0.174%. Core inflation edged up 0.1% in November. It was forecast increasing 2.8% year-on-year for a third straight month in December.

"While we welcomed a modest deceleration in core CPI ... the data all points to sticky inflation in both the service sector and in housing," said Joe Brusuelas, chief economist at RSM. "This is not well aligned with arguments for near-term rate cuts as the aggregate demand driven by consumer spending continues to support economic growth."

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama, Andrea Ricci and Diane Craft)