December 2024 Inflation

On January 15 the Bureau of Labor Statistics released December 2024 inflation. The headline read:

To say this understates the problem is an overstatement (apologies). Actual month-over-month overall inflation was +0.39%. That’s a 4.82% annual rate, 2.4 times the Fed’s goal of 2.0%. Despite this, the Fed decided to cut their target interest rate by 0.25 percentage points at their December 17-18 meeting. In terms of pure economic analysis, this makes no sense. I do have a hypothesis about their reasons, which I’ll reveal down toward the end. As usual, click here to download my Excel workbook.  And click here to download a zip file containing pdf versions of four Federal Reserve press releases used in this article.

Here’s a perspective on the last decade of inflation. The annual graph includes December-December and January-January calendar years. December-December means I can include 2024.

(click for larger image)

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Pay special attention to the sharp uptick in December 2024 inflation.

Economic Analysis

The December meeting was the third consecutive meeting where the Fed cut rates. Here’s the summary:

Way back in September quite a few of us said a 50 basis point rate cut was too much too soon. The two cuts after that pour additional fuel on the inflation bonfire. In the face of a 4.82% inflation rate, the December cut is flat-out unbelievable. Combined with the current government budget deficit and the size of the government debt, the third rate cut defies all economic logic, models, and analysis.

I predict the monthly inflation rate will hit a 6% annual rate sometime this year. (That’s 0.49% in a single month for those who want to track my prediction.) I’ll add one caveat. The next Fed meeting is January 28-29. If the Fed raises their interest rate target at that meeting, I’ll happily withdraw this forecast and apologize for my opinions expressed here. My advice: don’t bet your 401(k) on the Fed raising rates.

There remains one tiny ray of hope for the Fed. It’s possible they were looking at the “core” inflation rate to measure December 2024 inflation. That strips out food and fuel from the CPI. Why? Because prices in those markets are “volatile.” Ever since this concept was introduced I’ve believed this is (to use a technical term from economics) stupid. It’s like saying, “We don’t care if everybody buys groceries and gas. We need a measure of inflation that fluctuates less than what the overall CPI measures.” Why the economics profession (both in academia and on Wall Street) continue to pay any attention to core inflation remains a complete mystery to me. In this case, focusing on core inflation may have led the Fed into a series of bad policy moves.

So Why?

Over the past decade, the Fed has become increasingly politicized. Chair Jerome Powell should hang his head in shame. Their moves over the last quarter of 2024 seem designed to induce a wave of inflation early in the Trump administration.

This is a big mistake. Look for the Trump administration to propose repealing the Federal Reserve Act of 2013. Congress created the Fed. They can just as easily eliminate it.