U.S. inflation rises 0.3% in December, pushing annual rate to 3.4%

Investing.com -- Headline U.S. inflation accelerated in December, while an annual underlying reading slowed marginally, as Federal Reserve officials search for signs of easing price gains before rolling out possible interest rate cuts this year.

The seasonally-adjusted year-on-year consumer price index (CPI) in the world's largest economy sped up to 3.4% last month, up from 3.1% in November, according to data from the Bureau of Labor Statistics on Thursday. Month-on-month, the pace increased to 0.3%, driven by increased shelter and energy costs. Economists had seen the figures at 3.2% and 0.2%, respectively.

Meanwhile, the rate of the so-called "core" measure, which strips out volatile items like food and energy, ticked down to 3.9% annually from 4.0% in the prior month. On a monthly basis, core CPI matched November's mark of 0.3%. The core numbers, which are perceived to be a more accurate gauge of the stickiness of price trends than their overall counterparts, were estimated at 3.8% and 0.3%.

In a note to clients, analysts at Evercore ISI argued that, while headline CPI was "modestly higher than expected," the cooling of inflation is continuing "as most leading indicators [...] are soft."

Fed policymakers will likely be closely watching the data, which could factor into how they approach rate reductions later in 2024. In a speech on Wednesday, New York Fed President John Williams argued it is still too soon to call for cuts because inflation is well above the bank's stated 2% target.

Williams' comments echoed recent sentiments from other rate-setters, who have moved to temper soaring market enthusiasm for potential reductions early this year. This optimism, fueled by a surprisingly dovish Fed outlook last month, drove a rally in stocks in the final weeks of 2023 that has since lost some steam.

The Fed has lifted interest rates up to more than two-decade highs of 5.25% to 5.50% in a bid to defeat red-hot post-pandemic inflation, though it has recently hinted that this hiking cycle may have peaked following a sharp abatement in price growth in the second half of 2023. However, it remains uncertain if the central bank will manage to bring inflation down to 2% without sparking a meltdown in the wider economy -- a scenario known as a "soft landing."

A separate release from the Labor Department on Thursday showed that initial jobless claims registered 202,000 last week, inching down from 203,000 in the prior period. The four-week average, which aims to account for volatility in weekly unemployment claims, was also only slightly lower.

Along with inflation, economists have been keeping tabs on developments in U.S. labor demand, where continued strength may bolster the Fed's attempt to engineer a soft landing. 

The main stock averages in New York opened broadly higher in the wake of the CPI release, while the yields on rate-sensitive 2-year and benchmark 10-year U.S. Treasury bonds dipped. Yields typically move inversely prices.