By Howard Schneider, Michael S. Derby
ANNAPOLIS, Maryland (Reuters) -Federal Reserve officials said data released on Wednesday showed U.S. inflation was continuing to ease even as they noted heightened uncertainty in the coming months as they await a first glimpse of the incoming Trump administration's policies.
The final read on the Consumer Price Index for 2024, closing out the Biden administration and its battle with a pandemic-related breakout of fast-rising prices, showed price increases excluding food and energy costs eased to 3.2% in December from 3.3% in the prior month.
Though headline inflation rose slightly, the so-called core measure is seen as a better gauge of underlying price pressures. With the pace of housing inflation notably in decline, economists expect an upcoming report on the separate Personal Consumption Expenditures Price Index for December to be weak, perhaps even falling below the Fed's 2% target.
The PCE is used to set the central bank's inflation goal, and officials anticipate a notable slowing in the first part of this year.
The December CPI report "continues the story we have been on, which is that inflation is coming down towards target," Richmond Fed President Thomas Barkin told reporters at a Maryland Chamber of Commerce event.
"The process of disinflation remains in train," New York Fed President John Williams said in prepared remarks at an event in Connecticut.
The Fed is expected to hold its benchmark interest rate steady in the current 4.25%-4.50% range at its next policy meeting on Jan. 28-29, after reducing it by a full percentage point in the last three meetings of 2024.
At one point a steady series of rate cuts was expected through 2025, but stalled progress in lowering inflation prompted investors and Fed officials to trim their expectations to perhaps one or two quarter-percentage-point reductions in the coming year.
An unexpected surge of hiring in December, with more than a quarter of a million jobs added by firms and a drop in the unemployment rate to 4.1%, is likely to also bolster the view that the economy remains healthy, allowing the Fed to pause its rate cuts for now.
"The 'economy weakening' argument seems to be decaying," Barkin said. "You keep seeing good numbers on retail sales, unemployment, and the like ... Demand, you are hearing, is good, solid, fine."
'DIRECTION OF TRAVEL'
The economy's momentum and the continued progress on inflation, however, could be tested in coming months depending on how aggressively President-elect Donald Trump follows through on the promises he made during the election campaign to impose massive import tariffs, deport large numbers of unauthorized immigrants, and cut taxes.