US Inflation Rises to 2.9% in December, Prompting Market Rally

In December 2024, the United States experienced a 0.4% increase in the Consumer Price Index (CPI), marking the most significant monthly rise in nine months. This uptick was primarily driven by higher energy costs, notably a 4.4% surge in gasoline prices. On an annual basis, the CPI climbed to 2.9%, slightly surpassing economists' projections.

Despite the overall inflation increase, core CPI—which excludes volatile food and energy prices—rose by 0.2% in December, a slight deceleration from previous months. This brought the year-over-year core inflation rate to 3.2%, marginally below the anticipated 3.3%. The moderation in core inflation contributed to a significant rally on Wall Street, with the Dow Jones Industrial Average surging over 700 points (1.7%) as investors speculated on potential Federal Reserve rate cuts.

Federal Reserve officials expressed cautious optimism regarding the inflation trends. Richmond Fed President Thomas Barkin and New York Fed President John Williams noted easing inflation pressures, suggesting a possible shift in monetary policy. The central bank, which has been in an easing cycle since September, is expected to lower rates further this year, with some analysts anticipating cuts in June and December.

Energy costs, particularly gasoline, were significant contributors to the inflation uptick, despite decreases in other categories like personal care and communication. A robust job market further supports the likelihood of the Fed maintaining its current policy stance in the near term.

Overall, while the December inflation data indicates persistent price pressures, the moderation in core inflation and positive market reactions suggest a cautiously optimistic outlook for the U.S. economy moving forward.