U.S. inflation hits 8-month high in December

U.S. inflation saw its largest increase in eight months during December, driven by robust consumer spending on goods and services. The Personal Consumption Expenditures (PCE) Price Index rose 0.3%, with the 12-month inflation rate reaching 2.6%, according to the Commerce Department.

The core inflation rate, excluding volatile food and energy components, increased by 0.2% monthly, maintaining a 2.8% annual rate for the third consecutive month. This stalling in disinflation progress during the fourth quarter has implications for Federal Reserve policy.

The Fed, which kept rates unchanged in its latest meeting, removed language about inflation having "made progress" toward its 2% target from its policy statement. The central bank has projected only two rate cuts for the year, down from four previously anticipated, with no cuts expected before June.

Consumer spending jumped 0.7% in December, following a revised 0.6% increase in November. Goods outlays rose 0.9%, driven by automobiles, food, and energy products, while services spending increased 0.6%. The saving rate dropped to a two-year low of 3.8%.

Labor costs, measured by the Employment Cost Index, grew 0.9% in the fourth quarter and 3.8% annually through December, marking the slowest yearly increase since Q3 2021.

Market reaction saw stocks rising on Wall Street, while the dollar strengthened against other currencies and Treasury yields increased.

Economists remain divided on the outlook, with some expressing concern about the low saving rate's impact on future consumer spending, while others maintain optimism, citing strong household balance sheets and record housing wealth as supporting factors for continued consumer expenditure.

The inflation outlook faces additional uncertainty due to potential economic impacts of various policy measures, including fiscal, trade, and immigration policies.