U.S. inflation surged in December, marking its highest increase in eight months as consumer spending jumped. The Federal Reserve is expected to delay interest rate cuts amid persistent price pressures.
The Personal Consumption Expenditures (PCE) Price Index rose 0.3% last month, the largest gain since April, following a 0.1% increase in November. Annually, it climbed 2.6%, up from 2.4% in November. Core inflation, excluding food and energy, increased 0.2% monthly and 2.8% annually.
Labor costs also rose, with the Employment Cost Index (ECI) gaining 0.9% in Q4, following a 0.8% rise in Q3. Wages and salaries, the biggest labor cost component, increased 3.8% annually, slightly down from Q3’s 3.9%. Adjusted for inflation, real wages rose 0.9% year-over-year, supporting strong consumer spending.
Consumer spending, which accounts for over two-thirds of U.S. economic activity, jumped 0.7% in December after a revised 0.6% rise in November. The economy grew at a 2.3% annualized rate in Q4, driven by robust consumer demand.
Despite inflationary pressures, U.S. stocks opened higher, the dollar strengthened, and Treasury prices remained stable. The Fed has kept its benchmark rate at 4.25%-4.50% and expects only two rate cuts in 2024, down from four previously forecasted. No cut is expected before June.
The delay reflects economic uncertainty, including the impact of potential tax cuts, tariffs, and immigration policies. Analysts see the Fed maintaining a cautious approach as prices stabilize gradually in an unpredictable environment.
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