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Higher rents and food prices boosted overall U.S. inflation in December, a sign that the Federal Reserve’s drive to slow inflation to its 2% target may be a bumpy one.

The Consumer Price Index grew at an annual rate of 3.4%, according to the latest report from the Labor Depart, a 0.1% rise from the 3.1% annual inflation in November, and 0.2% more than the 3.2% economists expected. 

Excluding volatile food and energy costs, so-called core prices rose just 0.3% month over month, unchanged from November’s increase. Core prices were up 3.9% from a year earlier, down a tick from November’s 4% year-over year gain. Economists pay particular attention to core prices because, by excluding costs that typically jump around from month to month, they are seen as a better guide to the likely path of inflation.

“These readings support the Fed’s view that the policy stance should remain restrictive for some time,” Rubeela Farooqi, chief economist at High Frequency Economics, wrote in a report. “They also push back against pricing of imminent rate cuts.”

Overall inflation has cooled more or less steadily since hitting a four-decade high of 9.1% in mid-2022. Still, the persistence of still-elevated inflation helps explain why, despite steady economic growth, low unemployment and healthy hiring, polls show many Americans are dissatisfied with the economy — a likely key issue in the 2024 elections.

The Federal Reserve, which began aggressively raising interest rates in March 2022 to try to slow the pace of price increases, wants to reduce year-over-year inflation to its 2% target level.

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Economists pay particular attention to core prices because, by excluding costs that typically fluctuate sharply from month to month, they are a better guide to the likely path of inflation.

But the war against inflation isn’t won just yet.

Overall inflation is thought to have edged higher last month, putting it further above the Fed’s 2% target. According to the FactSet survey, economists think the broadest measure of consumer prices rose 0.2% from November to December and 3.2% from 12 months earlier. Both figures would mark a modest acceleration from the 0.1% October-November increase and the 3.1% year-over-year rise in November.

Those upticks wouldn’t likely cause concern. The index of overall inflation tends to bounce around from month to month.

“Inflation, as measured by the CPI, is moving in the right direction, but this release should squash any notion investors had of a March rate cut from the Fed,” Greg McBride, chief financial analyst with Bankrate, said in a note.

Overall, the progress against inflation has been significant. A year ago, the 12-month rise in the consumer price index was 6.5% — way down from a four-decade high of 9.1% in June 2022 but still painfully high. Now, it’s just above 3%. And wage gains have outpaced inflation in recent months, meaning that Americans’ average after-inflation take-home pay is up.

And when Fed officials discussed the inflation outlook at their most recent meeting last month, they noted some hopeful signs: An end to the supply chain backlogs that had caused parts shortages and inflation pressures and a drop in rent costs, which is beginning to spread through the economy.

Still, John Min, chief economist at the foreign exchange firm Monex USA, suggested that “the easy part” was slowing inflation from 9% to around 3%. Going “the last mile” to reach the Fed’s 2% target could prove the hardest stretch.

The December U.S. jobs report that was issued last week contained some cautionary news for the Fed: Average hourly wages rose 4.1% from a year earlier, up slightly from 4% in November. And 676,000 people left the workforce, reducing the proportion of adults who either have a job or are looking for one to 62.5%, the lowest level since February.

That is potentially concerning because when fewer people look for work, employers usually find it harder to fill jobs. As a result, they may feel compelled to sharply raise pay to attract job-seekers — and then pass on their higher labor costs to their customers through higher prices. That’s a cycle that can perpetuate inflation.

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