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U.S. inflation rises on food, housing

Inflation in the United States saw a modest uptick in December, primarily fueled by increases in rents and food prices, indicating that the Federal Reserve's efforts to curb inflation may face ongoing challenges.

According to the latest report from the Labor Department released on Thursday, overall prices climbed by 0.3 percent from November and registered a 3.4 percent increase from the same period last year. These figures surpassed the previous month's 0.1 percent monthly rise and the 3.1 percent annual inflation recorded in November.

When excluding the volatile costs of food and energy, known as core prices, the month-over-month increase remained steady at 0.3 percent, the same as November. Core prices were up 3.9 percent from a year earlier, a slight decrease from November's four percent year-over-year gain. Economists often focus on core prices as they provide a more stable measure, excluding elements that typically fluctuate from month to month, offering insights into the probable trajectory of inflation.

Despite a consistent decline since reaching a four-decade high of 9.1 percent in mid-2022, overall inflation persists at elevated levels. This persistence is a factor contributing to the dissatisfaction of many Americans with the economy, as reflected in various polls, likely to be a crucial issue in the upcoming 2024 elections.

The Federal Reserve, which began aggressively raising interest rates in March 2022 to counteract rising prices, aims to bring year-over-year inflation down to its two percent target.

While progress against inflation has been notable, with the 12-month rise in the consumer price index dropping to 3.4 percent from 6.5 percent a year ago, concerns remain. Wage gains have outpaced inflation in recent months, providing a boost to Americans' average after-inflation take-home pay.

Encouragingly, recent indicators suggest a positive trend in the fight against inflation. The Federal Reserve Bank of New York reported that consumers now anticipate inflation to be around three percent over the next year, marking the lowest one-year forecast since January 2021. Consumer expectations play a pivotal role in predicting future inflation, as heightened concerns often lead to increased spending, further fueling inflation. However, this harmful cycle does not seem to be taking hold.

During their most recent meeting, Federal Reserve officials highlighted some positive signs in the inflation outlook. The resolution of supply chain backlogs, causing shortages and inflationary pressures, along with a decline in rent costs, is beginning to have a positive ripple effect throughout the economy.

Economists remain cautiously optimistic that the recent shift from a nine percent inflation rate to around three percent is more achievable than reaching the Federal Reserve's elusive two percent target. However, the December U.S. jobs report issued last week introduced some cautionary notes, with average hourly wages rising to 4.1 percent from a year earlier and a reduction in the workforce, potentially making it more challenging for employers to fill positions. This could lead to higher labor costs, prompting businesses to pass on these expenses to consumers, perpetuating the cycle of inflation.