WASHINGTON — An inflation gauge closely watched by the Federal Reserve rose slightly last month, the latest sign that some consumer prices remain stubbornly elevated, even as inflation is cooling in fits and starts.
Friday’s report from the Commerce Department showed that consumer prices rose 2.6% in December from a year earlier, up from a 2.4% annual pace in November and the third straight increase. Excluding the volatile food and energy categories, prices increased 2.8% compared with a year ago, the same as in November and October.
The figures arrive just two days after Federal Reserve officials, led by Chair Jerome Powell, decided to pause their interest rate cuts in part because inflation has largely been stuck at about 2.5%, above their 2% target, for the past six months.
There were some positive signs in Wednesday’s report, however. When measured in shorter time frames, inflation is slowing: In December, core prices ticked up 0.2% from the previous month, a pace that is nearly consistent with the Fed’s annual target. Economists — and Fed officials — pay close attention to core prices because they provide a better read on where inflation is headed.
Overall inflation climbed 0.3% in December from the previous month, driven higher by a jump in gas prices. Monthly increases at that level, if they continued, would exceed the Fed’s target.
In the past three months, core prices have risen at an annual rate of just 2.2%, down from 2.6% in November.
The Commerce Department’s report also showed consumer spending rose a healthy 0.7% in December from the previous month, fueled in part by steady wage gains and higher stock prices and home values. Incomes rose 0.4%, the government said. With spending outpacing incomes, the savings rate fell to 3.8% from 4.1%.
Underlying trends point to lower inflation ahead. Apartment rental prices and other housing costs are slowly moderating. And a sluggish labor market has meant wage growth has slipped, which means companies are under less pressure to raise prices to offset higher labor costs.
“We seem to be set up for further progress,” Powell said Wednesday at a news conference, referring to inflation. “But being ‘seem to set up for’ it is one thing, having it is another. So we’re going to want to see further progress on inflation.”
Until then, Powell suggested, the Fed is likely to keep its key rate at about 4.3%, down a full percentage point from a two-decade peak last year before three cuts at the end of 2024. The Fed expects higher borrowing costs will weigh on spending and bring inflation down further.
Consumers, meanwhile, powered strong growth in the final three months of last year, when the economy expanded at a solid 2.3% annual rate. Growth was stronger in the July-September quarter, at 3.1%, but the fourth-quarter expansion was held back by a sharp reduction in business inventories, which should reverse in coming quarters.
