December's consumer price inflation report added weight to the narrative of a mixed economic recovery, analysts said.
While progress on inflation has been made, analysts highlight structural challenges, including labor market dynamics and global economic policy shifts, that could complicate the Federal Reserve's decisions.
To recap, the US prices index rose in December, driven by higher costs for food and energy, according to the latest consumer price index (CPI) report.
Headline CPI inflation climbed 0.4% over the month, matching the strongest monthly increase of 2024. Excluding food and energy, the core CPI rose a more subdued 0.2%, following four consecutive 0.3% monthly prints.
The annual CPI rate rose to 2.9% in December from 2.7% in November.
Wells Fargo noted that while core inflation remained moderate, persistently high food and energy prices underscore ongoing challenges for households and the Federal Reserve.
"Stickiness in inflation and uncertainty emanating from federal economic policy will keep the Federal Open Market Committee (FOMC) on hold for the next several months," Wells Fargo wrote in a research note.
The bank now anticipates two 25 basis point (bps) rate cuts this year — in September and December — down from its previous forecast of three cuts.
Elsewhere, Bill Adams, chief economist at Comerica, observed that inflation showed meaningful improvement over the past year but still fell short of the Federal Reserve's 2% target.
"Core CPI slowed in the first half of last year then largely flatlined in the second half," Adams said, citing non-shelter service prices, particularly insurance premiums, as a key driver of persistent inflation.
Looking ahead, Adams warned that higher tariffs and tighter immigration policies could exacerbate price pressures.
"Higher tariffs would raise the prices consumers pay for manufactured goods, and tighter immigration policies could tighten the job market and fuel a rebound in labor cost pressures," he explained.
Despite core CPI rising less than in previous months, "the trend remains too hot for comfort and the Fed is likely to extend its well telegraphed pause in rate cuts beyond March", said economists at ING.
However, they feel the pick-up in Treasury yields and the stronger dollar "will provide headwinds to growth and we still look for three 25bp rate cuts in 2025".
For now, the central bank appears poised to maintain its cautious approach, with any changes to monetary policy hinging on upcoming data.