Inflation jumped in December, complicating Fed aim of interest rate cuts

Consumer prices rose 3.4% in December compared to a year ago, accelerating markedly from the previous month and defying a smooth path down to normal levels, a report from the Bureau of Labor Statistics released on Thursday showed.

The Federal Reserve stands poised to dial back its inflation fight by cutting interest rates this year, but the latest inflation data could complicate those plans.

Interest rate cuts would ease borrowing payments for everything from credit cards to mortgages, but they risk stoking consumer demand and driving up inflation.

Prices last month rose faster than economists expected. The 3.4% rise of prices in December compared to a year ago sits more than a percentage point above the Fed's target rate.

The price increases last month owed primarily to a rise in housing and energy costs, the U.S. Bureau of Labor Statistics said. Gas prices increased in December compared to a month prior, after having fallen considerably in November, the data showed.

Price increases for some food items continue to far outpace overall inflation. The price of beef rose nearly 9% in December compared to a year ago, while the price of crackers rose nearly 8% over that period. Prices for biscuits, rolls and muffins rose more than 4% in December compared to a year ago.

Some foods, however, declined in price. The costs of pasta and rice dipped slightly in December compared to a year ago. The prices of butter and breakfast sausage also declined over that period.

Core inflation, a measure that leaves out volatile food and energy prices, delivered better news than the overall rate. Core inflation climbed 3.9% in December compared to a year ago, cooling slightly from the previous month.

The inflation data arrives days after a jobs report for December showed hiring surpassed economist expectations, rebuking concern about a recession in the coming months.

The resilient jobs market aligns with optimism among many observers that the U.S. could avert an economic downturn, achieving a "soft landing" in which price increases return to normal levels while the economy continues to grow.

However, the robust economic performance may pose a challenge for the Federal Reserve as it tries to cool the economy and slow price increases.

Inflation stands well below last summer's peak of over 9%, but remains well short of the Fed's target rate of 2%.

The Fed risks a rebound of inflation if it cuts interest rates too quickly, according to some economists. An additional burst of economic activity for an already robust economy could hike demand and raise prices once again.

If the Fed maintains high interest rates for a prolonged period, however, the elevated borrowing costs could stifle business investment and consumer spending. Such an outcome could ultimately weigh on economic growth, corporate profits and employment.

Speaking at a press conference in Washington, D.C., last month, Fed Chair Jerome Powell urged caution about the outlook for the central bank's effort to cool the economy and slow price increases.

"Inflation has eased from its highs and this has come without the significant increase in unemployment. That's very good news," Powell said.

"But inflation is too high, ongoing progress in bringing it down is not assured, and the path is uncertain," he added.

Many market observers are expecting interest rate cuts as soon as a Fed meeting in March. As of last week, markets put the probability of a rate cut in March at 75%, said Ellen Zentner, chief U.S. economist and managing director at Morgan Stanley.

However, observers holding such expectations "may be in for a disappointment," Zentner wrote last week, citing strong job gains that allow the Fed to keep rates high without fear of an imminent recession.

The cushion affords Fed policymakers "room to watch and wait," Zentner added.