US Inflation Likely Remained Elevated  01/15 06:18

   

   WASHINGTON (AP) -- U.S. inflation probably worsened last month on the back 
of higher prices for gas, eggs, and used cars, a trend that could lessen the 
chance that the Federal Reserve will cut its key interest rate much this year.

   On Wednesday the Labor Department is expected to report that in December the 
consumer price index rose 2.8% from a year ago, according to economists 
surveyed by FactSet, up from a 2.7% yearly increase in November. It would be 
the third straight rise, after inflation fell to a 3 1/2 year low of 2.4% in 
September.

   The uptick could fuel ongoing concerns among many economists and in 
financial markets that inflation has become stuck above the Fed's 2% target. 
Such concerns have sent interest rates on Treasury securities higher, which has 
also pushed up borrowing costs for mortgages, cars, and credit cards, even as 
the Fed has cut its key rate.

   Last Friday's unexpectedly strong jobs report caused stock and bond prices 
to plunge on fears that a healthy economy could keep inflation elevated, 
preventing the Fed from cutting further.

   Excluding the volatile food and energy categories, economists forecast that 
so-called core inflation remained at 3.3% in December for the fourth month in a 
row.

   On a monthly basis, prices likely rose 0.3% in December for the second month 
in a row. Price increases at that pace would exceed the Fed's 2% target. Core 
prices are forecast to have risen 0.2%.

   Some of the uptick in prices was likely fueled by one-time factors, such as 
another jump in the cost of eggs, which has been one of the most volatile food 
categories in recent years. An outbreak of avian flu is decimating many chicken 
flocks, reducing egg supply.

   Economists generally expect inflation to decline a bit in the coming months, 
as apartment rental prices, wages, and car insurance costs grow more slowly. 
But clouding the outlook are potentially inflationary policies from 
President-elect Donald Trump. Trump has proposed to boost tariffs on all 
imports to the U.S. and to implement mass deportations of unauthorized migrants.

   On Tuesday, Trump said that he would create the "External Revenue Service" 
to collect tariffs, suggesting he expects many duties to ultimately be imposed, 
even as he has also said he intends to use them as bargaining chips. During the 
campaign, he promised to impose up to 20% duties on all imports and as high as 
60% tariffs on goods from China.

   Last week, minutes from the Fed's December meeting showed that economists at 
the central bank expect inflation to remain about the same this year as in 
2024, pushed up a bit by higher tariffs.

   Fed Chair Jerome Powell has said the central bank will keep its key interest 
rate elevated until inflation is back to 2%. As a result, Wall Street investors 
expect the Fed to cut its key rate just a single time this year, from its 
current level of 4.3%, according to futures prices.

   Other borrowing costs remain high, in part because of expectations for 
higher inflation and few Fed rate cuts. Mortgage rates, which are strongly 
influenced by the yield on the 10-year Treasury note, rose for the fourth 
straight time last week to 6.9%, far above the pandemic-era lows of below 3%.

   With the job market resilient -- the unemployment rate ticked down to a low 
4.1% last month -- consumers are able to keep spending and drive growth. If 
demand exceeds what companies can produce, however, that could fuel further 
inflation.

   Earlier this month, several prominent economists, including former Federal 
Reserve Chair Ben Bernanke, agreed that the tariffs Trump will ultimately 
impose will probably only have minor effects on inflation. The issue was 
discussed at the American Economic Association's annual meeting in San 
Francisco.

   Jason Furman, a top economic adviser during the Obama administration, said 
at the conference that the duties may lift the annual inflation rate by just 
several tenths of a percentage point. But he added that even an increase of 
that size could be enough to affect the Fed's rate decisions.

   "You are in a world where the Trump policies are more like tenths, than 
something cataclysmic," he said Jan. 4. "But I think we're also in a world 
where the direction of whether rates are staying the same, going down, or going 
up, depends on those tenths."