Investors cheered December's inflation data. Experts say US economy is not 'out of the woods' yet.
Stocks rallied Wednesday after December’s CPI print finally showed some relief in core inflation and investors calibrated Fed rate cut bets.
But the threat of sticky prices still looms in the face of a regime change in Washington when President-elect Donald Trump takes office next week. And economists largely agree that the fight to curb inflation is far from over.
“It hasn’t been steady on inflation,” Claudia Sahm, chief economist at New Century Advisors and former Federal Reserve economist, told Yahoo Finance’s Morning Brief program. “It’s been quite uneven.”
Although inflation has been slowing, it has remained above the Federal Reserve’s 2% target on an annual basis. Higher costs for shelter and core services like medical care and insurance have contributed to stubborn readings in recent months, with consumers simultaneously feeling the pinch at grocery stores and also at the pump.
Read more: Everyday prices keep climbing, even amid steadier overall inflation
“I don’t think we’re completely out of the woods here,” Ed Yardeni, president of Yardeni Research, told Yahoo Finance’s Market Domination Overtime. “We have to remember that towards the end of 2023, there were disinflation trends. And then we got into 2024 and we saw a little bit of a reversal of that.”
Yardeni noted economic data will likely continue to point in different directions as markets weigh what should be “mixed bags” of data throughout the next year.
To that point, rising wages and a strong labor market have somewhat offset recent pricing pressures, but underlying trends have shown continued stickiness in categories that most households rely on. That makes the Fed’s job even tougher to pull off.
Read more: What the Fed rate cut means for bank accounts, CDs, loans, and credit cards
“Remember, it’s not just about [inflation] coming down. It’s about it getting to 2% and staying at 2%,” Sahm said. “The Fed really wants to see sustained progress and they put a high bar.”
“It’s a bit of a breather to get some ‘not not’ bad news,” she continued, referencing December’s deceleration in shelter inflation and monthly core prices. But “it’s really not a game changer. It’s a lot more of what we’ve seen with the month-to-month volatility mixed in.”
And volatility will likely pick up with Trump set to take office on Monday.
Trump’s proposed policies, such as high tariffs on imported goods, tax cuts for corporations, and curbs on immigration, are seen as inflationary. And those policies could further complicate the central bank’s path forward for interest rates.
“There’s a lot of discussion about fiscal policy, a lot of discussion about tariffs,” Sahm said, categorizing tariffs as a “wild card” for the US economy. “And that will be very relevant potentially for inflation.”
“We’re on that path [toward 2%],” she said. “But unfortunately, there are some big question marks ahead of us that could push us off or at least delay that progress.”
BlackRock’s Rick Rieder underscored this “significant uncertainty” in a note to clients on Wednesday, writing, “The likelihood is that most of the meaningful progress is behind us at this stage, and inflation may remain sticky at levels higher than the Federal Reserve would ideally like.”
“While we do think inflation should come down further, the progress from here may be slow and uneven, not least due to the great uncertainties that face the economy with fiscal policy changes coming over the next year.”
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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