The US inflation trend is upwards. (Photo: Freepik, paopano)
Washington – Is the USA now threatened with the yo-yo effect after the friendly inflation trend? A strong economy and Trump’s plans could fuel prices – and lead the US Federal Reserve to keep interest rates high. Today the US government is publishing consumer prices for December (2:30 p.m. CET).
Economists expect inflation to be 2.8 percent in December on average according to FactSet. The annual rate would increase by 0.1 percent. For the important core inflation excluding the volatile components of food and energy, the average estimate assumes stagnation at 3.3 percent.
Where prices rise sharply – analysts expect greater gains
Price driver in November again increased spending on services and housing at an annual rate of 4.7 and 4.6 percent respectively. In December it could be loud Kathy Bostjancic by Nationwide Gasoline prices and food costs make a stronger contribution.
They are more pessimistic than average Analysts at Prestige Economics: You warn of a jump in the annual rate to 3 percent and core inflation to 3.4 percent. However, a decline in inflation is possible in the second quarter of 2025 due to favorable comparison effects.
What drives up prices – Fed decision-makers’ forecast
On the other hand, there are various upward risks for US inflation: For example strong job gains in December and the increased number of job vacancies. Trump’s tariffs, the expulsion of illegal migrants as well as deregulation and tax cuts could also drive up prices and wages.
The minutes of the last Fed meeting in December shows: The US monetary authorities are aware of the dangers. The so-called dot diagram, in which Fed decision-makers make quarterly interest rate forecasts, only shows two interest rate cuts of 0.25 percent each in 2025.
Fight against inflation – consumers with more inflation
In 2024, the central bankers have reduced the key interest rate in three steps since September by a total of 100 basis points, to the current range of 4.25 to 4.5 percent. They had previously increased borrowing costs 11 times since March 2022 to combat runaway inflation.
The irony of history: Trump may have benefited from US voters’ frustration with inflation – but citizens do not believe that he will turn the tide. Given his foreseeable policies, the Consumer price expectations in January, according to the University of Michigan, from 2.8 to 3.3 percent for 2025.
Economists’ interest rate expectations – FedWatch Tool forecast
Expectations for interest rates are falling accordingly. After the Fed weakened its forecast to 2 rate cuts in 2025, economists expect for the first half of the year that key interest rates will remain stable at 425 to 450 basis points. The markets have now also shifted to this course.
This forms the current interest rate cut bets on the CME futures exchange FedWatch Tool away. Accordingly, the probability of the key interest rates remaining the same in the next three Fed decisions, including the meeting on May 7th, is currently 64.7 percent. (As of January 14th, 5:50 p.m. CET).