Inflation Holds Steady in December as Fed Watches Tariff Impact
The Federal Reserve’s preferred inflation gauge, the core Personal Consumption Expenditures (PCE) index, showed prices rose in line with expectations in December, keeping inflation above the central bank’s 2% target. The latest data comes as the Fed pauses its rate-cutting cycle and monitors potential impacts from President Donald Trump’s tariff plans.
December Inflation Data Meets Expectations
The core PCE index, which excludes volatile food and energy costs, increased by 0.2% in December compared to the previous month, matching Wall Street forecasts. This marked a slight uptick from November’s 0.1% rise. On an annual basis, core PCE rose 2.8%, unchanged from November and in line with expectations. Meanwhile, overall PCE inflation increased by 2.6% year-over-year, up from 2.4% in November.
The data underscores the persistence of inflationary pressures in the U.S. economy, even as the Federal Reserve has paused its rate-cutting cycle after reducing rates at its last three meetings. Fed Chair Jerome Powell acknowledged during a press conference on Wednesday that inflation remains “somewhat elevated relative to our 2% longer-run goal.”
Fed Pauses Rate Cuts Amid Policy Uncertainty
The Federal Reserve’s decision to hold interest rates steady reflects a cautious approach as it awaits more clarity on inflation trends and the potential impact of Trump’s trade policies. Powell highlighted several areas of uncertainty, including tariffs, immigration, fiscal policy, and regulatory changes, which could influence the economic outlook.
“In the current situation, there’s probably some elevated uncertainty because of significant policy shifts in those four areas,” Powell said. Economists believe the Fed is taking a wait-and-see approach, particularly as Trump’s tariff plans could further stoke inflation.
Tariff Threats Loom Over Inflation Outlook
President Trump has announced plans to impose a 25% tariff on imports from Mexico and Canada starting February 1, a move that many analysts fear could keep inflation above the Fed’s target. Tariffs typically lead to higher prices for imported goods, which can ripple through the economy and push overall inflation higher.
The potential for new tariffs adds another layer of complexity to the Fed’s inflation management strategy. While the central bank has signaled it is comfortable with inflation running slightly above its 2% target temporarily, sustained inflationary pressures could force it to reconsider its policy stance.
What’s Next for the Fed?
The Fed’s pause in rate cuts suggests it is prioritizing data-driven decisions over preemptive action. With inflation remaining elevated and uncertainty surrounding trade policies, the central bank is likely to remain cautious in the coming months. Economists will be closely watching upcoming inflation reports and developments in Trump’s tariff plans to gauge the Fed’s next moves.
For now, the December PCE data reinforces the view that inflation is holding steady but remains a key concern for policymakers. As the Fed navigates a complex economic landscape, its ability to balance inflation control with growth support will be critical in the months ahead.