The latest Consumer Price Index (CPI) report shows inflation increased 0.4 percent in December, after rising 0.3 percent the month before, the Bureau of Labor Statistics announced on Wednesday, five days before President-elect Donald Trump takes office.
Why It Matters
A rise in inflation right before Trump returns to the White House could spell a headache for the 47th president, who has sworn to "unleash energy production, slash regulations … and repeal Biden's tax hikes to get inflation down as fast as possible" and interest rates back under control.
As the Fed continues its focus on lowering the rate of price hikes by bringing down interest rates, eyes are turning to the incoming Trump administration, which has proposed higher tariffs on imported goods, tax reductions for corporations and mass deportations of undocumented workers. The policy proposals have been earmarked as potentially raising inflation over the course of the coming year.
What To Know
The CPI is the most closely watched measure of inflation, which has remained higher than the Federal Reserve's 2 percent target since March 2021—largely owing to the seismic impact of the coronavirus pandemic and the international conflict between Russia and Ukraine.
The latest increase in the CPI is the third in a row, and it leaves annual inflation at its highest level since July.
High inflation has dogged President Joe Biden's administration. While prices have risen and then dropped significantly under Biden's tenure, the CPI report confirms that Trump is set to inherit a stubborn economic reality from his predecessor.
The Fed, which sets interest rates, has already shied away from more dramatic rate cuts ahead of Trump's return to the White House. It made three small rate cuts in 2024, bringing the target inflation measure to between 4.25 percent and 4.5 percent.
"I think we're in a good place, but I think from here it's a new phase and we're going to be cautious about further cuts," Fed Chair Jerome Powell said at a press conference in December.
The Fed has also indicated its skepticism that Trump's economic agenda will bring down inflation in the near term. Minutes from a recent meeting said that "recent higher-than-expected readings on inflation, and the effects of potential changes in trade and immigration policy, suggested that the process could take longer than previously anticipated."
Further Rate Cuts
As inflation has risen for the third month in a row and the prospect of Trump's economic agenda looms, experts have said the Fed is unlikely to cut interest rates again in the immediate term.
"The CPI report released today means that the Fed will almost certainly continue its pause this month and that the possibility of a rate hike later this year is very unlikely," Paul Mueller, a senior fellow at the American Institute for Economic Research, told Newsweek.
Ali Jaffery, an economist at CIBC Capital Markets, said that while Wednesday's CPI report was welcomed, it didn't "change the game plan for the Fed."
"The labor market and growth remain on solid footing, so they can comfortably wait for continued inflation progress and more insight into the future directions of fiscal and trade policy," he said.
What People Are Saying
Paul Mueller, a senior fellow at the American Institute for Economic Research, told Newsweek: "The incoming Trump administration shouldn't count on lower short-term interest rates to give the economy a tailwind. If they can follow through on their commitment to lower the federal deficit, reduce regulation, and increase energy production, we should see long-term interest rates on the 10-year and 30-year Treasuries begin to come down."
"Falling long-term rates will have a greater impact on ordinary Americans than the Fed's short-term interest rate target. Mortgage rates, car loan rates, and other consumer debt interest rates tend to track long-term Treasury rates, not the short-term Fed target."
Tina Adatia, the head of fixed income client portfolio management at Goldman Sachs Asset Management, said: "While today's release is likely insufficient to put a January rate cut back on the table, it strengthens the case that the Fed's cutting cycle has not yet run its course. With labor market data remaining robust, however, the Fed has scope to be patient and more good inflation data will be required for the Fed to deliver further easing."
What Happens Next
Trump's inauguration is scheduled for January 20, meaning his fiscal agenda is set to commence shortly. If the Senate confirmation process proceeds without complications, financier Scott Bessent will become Trump's Treasury secretary.
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