December CPI Inflation Report May Lower Expectations for 2025 Fed Rate Cuts

As financial markets react to the December US jobs report, another key economic event is approaching: the release of the Consumer Price Index (CPI) inflation report for December.

The data, set to be unveiled on January 15, could play a significant role in shaping expectations for the Federal Reserve’s interest rate cuts in 2025. While investors are closely watching for any signs of inflationary pressure, base effects may lead to an acceleration in year-on-year inflation rates, which could have important implications for future Federal Reserve policy.

After the release of the December jobs report, which showed strong employment gains and a lower unemployment rate, financial markets experienced turbulence. Equities and bond prices fell, while the US dollar and bond yields surged. The jobs report, showing 256,000 new positions added, raised concerns that a strong labor market could delay the Fed’s plans for interest rate cuts, particularly as inflation remains elevated.

Alongside the jobs data, attention has turned to the December CPI report, which could provide further clarity on the inflation trajectory. Economists anticipate that year-on-year inflation may tick up in December, with total CPI potentially rising to 3.0% from 2.7% in November, and core CPI moving from 3.3% to 3.4%. These increases could reinforce concerns about persistent inflation, making it less likely for the Federal Reserve to ease monetary policy in the near future.

The Federal Reserve’s December projections had already indicated expectations for only two 0.25% rate cuts by the end of 2025. However, if inflationary pressures persist or accelerate, those expectations could shift, with markets revising their outlook to reflect fewer rate cuts—or even none at all.

Beyond the immediate market reaction, there is some speculation that the inflationary spike seen in the year-on-year figures could be temporary. Some analysts predict that the effects of base comparisons will result in lower inflation rates later in 2025, potentially allowing the Fed to resume rate cuts in the second half of the year. However, until then, the Federal Reserve is unlikely to take aggressive action, particularly given the strong economic growth data from late 2024, including solid retail sales and industrial production numbers.

With input from the Financial Times and Forbes.