Core Inflation Downtick to Allow Fed to Cut in H2
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Global Economy Briefs

Timely insights from the Economy, Strategy & Finance Center

Modest softening in consumer price inflation in December is a positive signal that underlying inflationary forces will likely continue to moderate and allow the Fed to resume rate cuts in H2. While the Consumer Price Index (CPI) is not the measure the Fed uses to guide monetary policy, it is a useful gauge for determining the direction of the Personal Consumption Expenditure (PCE) deflator, which is the Fed’s preferred inflation metric.

Core Inflation Downtick to Allow Fed to Cut in H2

January 15, 2025

Modest softening in consumer price inflation in December is a positive signal that underlying inflationary forces will likely continue to moderate and allow the Fed to resume rate cuts in H2. While the Consumer Price Index (CPI) is not the measure the Fed uses to guide monetary policy, it is a useful gauge for determining the direction of the Personal Consumption Expenditure (PCE) deflator, which is the Fed’s preferred inflation metric.

Trusted Insights for What’s Ahead®™

  • Continued health in the labor market, strong tracking for Q4 real GDP growth, and sticky core inflation suggest the Fed may delay the next rate cut until July.
  • We anticipate 25bp of cuts each in July, September and December, which would lower the federal funds rate target range to 3.50-3.75 percent by yearend.
  • This path is also consistent with our call for consumer inflation to stabilize at the Fed’s 2-percent target around mid-2026.

Figure 1. Core CPI inflation ticked down

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Sources: Bureau of Labor Statistics, Bureau of Economic Analysis, and The Conference Board.

Nevertheless, despite Core Consumer Price Index (Core CPI) inf

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Author

Yelena Shulyatyeva

Yelena Shulyatyeva

Senior US Economist

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