New data from the U.S. Bureau of Labor Statistics on Wednesday showed a key inflation gauge slowed for the first time since July.
On a "core" basis, which excludes volatile food and natural gas costs, the consumer price index (CPI) rose 0.2% in December from the previous month, a slowdown from November's 0.3% monthly increase. On an annual basis, prices rose 3.2%.
Prior to the December release, annual core CPI growth had been steady at 3.3% over the past four months. This is the first year-on-year price growth slowdown in core CPI since July.
The print is the latest economic data the Fed will consider before its next interest rate decision later this month. Stocks rose after the report, with the 10-year Treasury yield (^TNX) falling 12 basis points below 4.7%.
Read more: What the Fed's rate cuts mean for bank accounts, certificates of deposit, loans and credit cards
"There's good reason for the positive market reaction this morning: The Fed can accept a temporary rise if the rise in headline CPI doesn't spill over into core CPI, which is what happened in December," said Eugenio, chief economist at Raymond James. ." Aleman wrote in a note on Wednesday.
Overall consumer prices rose as expected last month. The CPI rose by 2.9% year-on-year in December, which was higher than the 2.7% increase in November. The annual increase was in line with economists' expectations.
The index rose 0.4% from the previous month, up from a 0.3% gain in November and in line with economists' expectations.
Seasonal factors such as rising fuel costs and continued stickiness in food inflation contributed to the higher overall data.
Core inflation remains high as the cost of housing and services such as insurance and health care rises. Used car prices also rose strongly for a third consecutive month, rising 1.2% in December after rising 2% monthly in November.
Although inflation has been slowing, the annual rate remains above the Fed's 2% target.
"Inflation is not stable," Claudia Sahm, chief economist at New Century Advisors and a former Fed economist, told Yahoo Finance's Morning Briefing show. "It's pretty much the same. Unbalanced, but it's nice to see some progress in the right direction. I think that's the most important part of it. We've been in a very 'wait and see' situation on inflation." . "
"Hearing some 'no no' bad news this morning was a little bit of a breather," she continued. "But it's really not a game changer. It has to do with the mix of month-to-month volatility that we're seeing."
The election of Donald Trump as the next president of the United States further complicates the outlook, with some economists believing the country could face another resurgence in inflation if Trump delivers on his key campaign promises. The president-elect will be sworn in next week.
Trump's proposed policies, such as high tariffs on imported goods, tax cuts for businesses and restrictions on immigration, are seen as inflationary. These policies could further complicate the central bank's interest rate path.
Notable elements of the inflation data included the housing index, which rose at an unadjusted annual rate of 4.6%, down slightly from November's 4.7% gain and the smallest gain in the 12 months since January 2022. The index rose 0.3% from the previous month, compared with November.
Economists say the rise in core inflation data over the past few months is largely attributable to sticky housing inflation.
Between November and December, the rent and owner-equivalent rent (OER) index both rose 0.3%, a slight acceleration from the previous month's 0.2% increase. Owner equivalent rent is the hypothetical rent a homeowner would pay for the same property.
The accommodation away from home index fell 1% in December after rising 3.2% in November.
Meanwhile, the energy index rose 2.6% month-on-month, after rising just 0.2% in November. On an annual basis, the energy index fell 0.5% after falling 3.2% the previous month.
In the energy sector, natural gas prices rose sharply, rising 4.4% in December after rising slightly 0.6% the previous month.
The food index rose 2.5% in December from a year earlier, with food prices rising 0.3% month-on-month - proving to be a tricky category for inflation. The eating at home and eating out indexes both rose 0.3% in December.
Read more: Daily prices still climbing even as headline inflation stabilizes
Notably, on an annual basis, groceries posted their highest gains since October 2023. Egg prices continued to perform well, rising 3.2% month-on-month after rising 8.2% in November. Egg prices have increased by 37% compared to last year.
Other indices that saw significant increases from last year include motor insurance (+11.3%), health (+2.8%), education (+4%) and entertainment (+1.1%).
alexandra canal is a senior reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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