Strengthening Inflation Poses Challenge for Trump, Fed

Harriet Torry and Nick Timiraos

Wed, Dec 11, 2024, 3:32 PM 4 min read

Progress on bringing down inflation stalled in November, with the consumer-price index of goods and services costs ticking up to a 2.7% increase.

Prices of consumer goods—everything from cars to living-room furniture, but excluding food and energy—increased at the fastest month-over-month pace in a year and a half, led by a jump in vehicle prices. That was partly because drivers replaced damaged cars and trucks after recent devastating hurricanes.

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The rise is notable because prices for many goods had generally been falling or flat for about a year through August. That trend appears to have now reversed.

The situation presents President-elect Donald Trump with a deep and central challenge as he prepares to take office with a promise to beat back inflation. Economists fear that goods inflation could accelerate if the incoming Trump administration follows through on threats to impose across-the-board tariffs.

The CPI report also raises questions for the Federal Reserve about the pace of rate cuts in the year ahead. The Fed is widely expected to cut rates by a quarter-point at its meeting next week, its third cut in a row.

Investors in interest-rate futures markets on Wednesday viewed a rate cut next week as a near certainty. A separate report on inflation due Thursday could help seal the case.

Officials have indicated sticky inflation could lead them to slow the pace of rate reductions or stop altogether.

The Dow Jones Industrial Average edged lower. The S&P 500 rose, and the Nasdaq Composite jumped 1.8%, crossing 20,000 for the first time.

Core prices that exclude volatile food and energy prices rose 0.3% month over month in November, the fourth straight month of stiff prices there. That held year-over-year core inflation at 3.3%. The results were mostly in line with what economists had expected.

All year long, analysts have looked for evidence that services prices, particularly for housing, would slow. Wednesday’s report offered hope on that front. The pace of housing-cost increases cooled slightly from the prior month, which economists said was a welcome development.

A question now is which trends continue in the months ahead: the positive developments on housing or the setback on goods prices.

Diane Swonk, chief economist at KPMG Economics, said there are signs that consumers are buying big-ticket items like cars to get ahead of potential tariff-related price increases.

“That is sort of a muscle memory,” Swonk said. “Something like that never would have happened prepandemic, and the fact that we saw it is just a red flag for the Fed to watch out for.”

Some economists also voiced concerns about persistent inflation in the services sector, which makes up the lion’s share of U.S. economic activity. Medical care costs rose 0.4% for the second month in a row.

“Overall, we’re looking at an environment where the low-hanging fruit has been picked and it’s getting harder and harder to make further inroads into reining in inflation,” said Sarah House, senior economist for Wells Fargo.

“Now we’re getting to a point where you really need the demand side of the economy to weaken,” she said. “That’s what makes the last mile so hard.”

Consumers have become more optimistic following the U.S. presidential election, according to measures from the University of Michigan and the Conference Board.

Business confidence has improved, too, on hopes of more business-friendly tax and regulatory policies under the incoming Republican administration.

On Tuesday, the National Federation of Independent Business said its small-business optimism index jumped in November to its highest reading since June 2021. The Business Roundtable CEO Economic Outlook Index, which measures company plans for capital investment, hiring and sales, rose to the highest level in more than two years in the fourth quarter.

Businesses say inflation is normalizing after a volatile few years of supply-chain disruptions and swings in demand, and consumers continue to spend at a healthy clip.

“Mainstream households are feeling more confident and are returning to their prepandemic shopping patterns more quickly,” said Kroger Chief Executive Rodney McMullen on an earnings call last week.

Still, he warned that “budget conscious households remain under pressure as the effects of multiyear inflation and higher interest rates have had a larger impact on these households.”