US inflation accelerated in December as Americans paid more for housing and driving, challenging investor bets that the Federal Reserve will cut interest rates soon.
The consumer price index increased 3.4% in the year through December, the most in three months according to government figures. On a monthly basis, it also rose by more than forecast.
The CPI excluding food and energy rose 0.3% in December from a month earlier. On an annual basis, the so-called core measure increased 3.9%. Economists favor the core metric as a better gauge of the trend in inflation than the overall CPI.
The Bureau of Labor Statistics figures showed increases in shelter, electricity and motor-vehicle insurance. Used-car prices increased for a second month, defying expectations for a decline.
Despite the pickup, the figures cap a year in which inflation broadly eased without doing much damage to the labor market, setting the stage for the Fed to lower borrowing costs this year.
Officials' latest economic projections show they expect three rate cuts in 2024, though policymakers have pushed back against market expectations that the first reduction could come as soon as March.
Treasury yields and the dollar rose, while stock-index futures fluctuated after the report. Fed officials next meet at the end of this month.
Shelter prices, which make up about a third of the overall CPI index and contributed to more than half of its advance, rose 0.5% in December. The gain included a rise in hotel prices that were down in the prior month. Economists see a sustained moderation in this category as key to bringing core inflation down to the Fed's target.
Excluding housing and energy, services prices climbed 0.4% from November, easing slightly from the prior month, according to Bloomberg calculations. While Fed Chair Jerome Powell and his colleagues have stressed the importance of looking at such a metric when assessing the nation's inflation trajectory, they compute it based on a separate index.
Unlike services, a sustained decline in the price of goods has been providing some relief to consumers in recent months. So-called core goods prices, which exclude food and energy commodities, were little changed after falling six straight months.
That defied projections for another decline, largely because of the unexpected pickup in used-car prices. Apparel prices also surprised with a small advance after falling sharply in November, while motor-vehicle insurance rose on an annual basis by the most since 1976.
Separate figures on Thursday showed applications for unemployment insurance held at a historically low level last week, while the number of people receiving benefits fell to the lowest level since October.
The Fed is looking for softer labor-market conditions to rein in demand across the economy, especially after last week's mostly solid jobs report. A separate report Thursday showed real earnings advanced 0.8% in December from a year earlier, extending a months-long streak in which wage growth has modestly outpaced inflation.
Toward the end of the year, U.S. consumers grew more sanguine about the inflation outlook, with several metrics of near-term expectations declining to the lowest levels since early 2021. That's helped lift measures of consumer sentiment.
However, it hasn't been the same boon for Joe Biden. Despite the progress on easing price pressures, inflation has dogged Biden's presidency, with his approval rating at a similar level today as it was when the overall CPI peaked above 9% in June 2022.
Voters rank this issue, along with the broader economy, of high importance for this year's election, but further softening in the jobs market could undercut the political benefits of slower inflation.
Looking ahead, inflation is expected to moderate further this year toward the Fed's 2% target, especially as housing costs are seen easing. However, other factors like rising shipping costs due to attacks in the Red Sea and low water levels in the Panama Canal threaten to upend progress in goods deflation, while an escalation of the war in the Middle East — which could put upward pressure on oil prices — can't be ruled out.
