Key takeaways
Inflation is down considerably from its mid-2022 peak of more than 9%.
The Consumer Price Index rose modestly to 2.7% for the 12 months ending in November.
In September and November, the Fed implemented interest rate cuts, with markets anticipating a December rate cut as well.
For the 12-month period ending in November 2024, the Consumer Price Index (CPI) rose 2.7%. Although inflation trended modestly higher in October and November, the uptick is not considered significant, though further progress on reducing inflation appears to have stalled.1
“One factor worth watching is that inflation has stabilized at both the headline level and at the core level,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “At the same time, the downward inflation trend we saw earlier seems to have disappeared.”
When eliminating the volatile food and energy sectors, so-called “core” inflation remains higher than the broader CPI. The core inflation calculation still includes, among other categories, costs for housing, transportation and medical care. November’s inflation report showed core inflation growing by 3.3% over the previous 12 months, little changed since May 2024.1
The biggest price changes in the past 12 months occurred in transportation services (+7.1%) and shelter (+4.7). By contrast, energy costs were 8.5% lower than a year ago while food prices rose just 2.4% over the same 12-month period.1
Inflation has been the Federal Reserve’s primary monetary policy focus for the past two years. High inflation prompted the Fed to raise interest rates by more than 5% in a little more than a year, ending in mid-2023. In September 2024, the Fed cut the short-term federal funds target rate (that guides lending rates used by banks for overnight loans to one another and tends to influence consumer interest rates on such things as credit cards, mortgages and auto loans) by 0.50%. Just after November’s election, the Fed cut rates again by 0.25%. Based on market expectations, November’s inflation report likely gives the Fed the evidence it needs to cut interest rates for a third time this year at its mid-December meeting.2
What’s less clear are factors that could affect inflation going forward. President-elect Donald Trump proposed significant tariff increases on products imported from three key trading partners, China, Mexico and Canada. “The magnitude of tariffs currently being proposed, from 10% to 25%, are well beyond previous tariff levels,” says Haworth. “This could push prices higher.” In addition, if Trump, backed by a Republican-led Congress, implements planned tax cuts that could stimulate economic growth, which could also prove to be inflationary.
Fed Chair Jerome Powell in early November stated, “The election will have no effects on our policy decisions.” Powell added, “In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook and the balance of risks. We are not on a preset course.”3
Markets now anticipate the Fed may scale back plans for interest rate cuts in 2025. “September’s rate cut was driven more by concerns of a slowing labor market,” says Haworth. “But now, as the Fed weighs interest rate policy, it’s more of a balance between keeping inflation in check and protecting the job market.”
The Fed has indicated a desire to return the fed funds target rates to what it considers a neutral range, likely somewhere near 3% (prior to the Fed’s December meeting, the rate stands at a range of 4.50% to 4.75% today). The Fed targets 2% inflation, as measured by the annual change in the personal consumption expenditure (PCE) price index, a measure of spending on goods and services.4 Progress on meeting the Fed’s 2% inflation target stalled in recent months. PCE moved slightly higher in October, with the headline PCE index at 2.3% for the previous 12 months, compared to 2.1% for the 12 months ending in September. The narrower “core” PCE (excluding the volatile food and energy categories) rose modestly to 2.8%, the same as the prior two months.5
“Though core inflation prices remain higher than overall inflation, the Fed can live with that assuming, as is the case for now, that core costs remain level,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management.
“Though core inflation prices remain higher than overall inflation, the Fed can live with that assuming, as is the case for now, that core costs remain level,” says Haworth.
After rising dramatically in 2021, inflation, as measured by CPI, is on pace to decline for the third consecutive calendar year.6
2025 begins with mixed inflation expectations. Consumer surveys, says Haworth, tell us, “We’ll see inflation closer to 3% in 2025.” However, Haworth notes that even with inflation rising modestly, “If it’s combined with real economic growth, it results in a constructive economic story.”
As inflation leveled off in 2023 and 2024, equity markets responded favorably. By mid-December 2024, the S&P 500 was on track to its second consecutive year of gains exceeding 25%-plus.7 Investors may want to consider an overweight allocation to equities relative to fixed income investments, while retaining a neutral weight in real assets.
At the same time, it’s important to remember that a consistent long-term strategy tends to work to the benefit of most investors. This likely precludes any dramatic changes to your asset allocation strategy in response to today’s capital market environment.
Be sure to talk with your financial professional about what steps may be most appropriate for your situation.
The inflation rate measures the change in living costs for the average consumer over a given period of time. While there are various measures of inflation, the one most followed is the Consumer Price Index (CPI), a measure of changes in the prices paid by urban consumers for a market basket of consumer goods and services. The inflation rate for the 12 months ending November 2024 (as measured by CPI) was 2.7%, down from a peak of 9.1% in mid-2022, but up modestly from levels reached during 2024’s summer months.
Changes in living costs, reflected by inflation, represent a loss of purchasing power. This is an important consideration not only in your day-to-day living, but in your long-term financial planning. To improve your quality of life over time, you’ll want to see your income grow faster than the inflation rate. To retain your lifestyle in retirement, you want to be sure that income you receive from your own investments and other sources keeps pace with changes in living costs over the course of retirement. This is why inflation has such a significant impact on individuals.
The Federal Reserve, which is charged with maintaining stable prices, targets a long-term inflation rate of 2%. Between 2012 and 2020, the annual inflation rate was between 0.7% and 2.3%. Since that time, inflation has been much higher. It stood at 7.0% in 2021, 6.5% in 2022 and 3.4% in 2023. Through November 2024, inflation over the previous 12 months was 2.7%.6 Still, headline inflation remains above the Federal Reserve’s 2% target.4
Having reached new record highs more than 50 times in 2024, investors wonder if S&P 500 is due for a pullback.
By easing monetary policy with interest rate cuts, does the Federal Reserve view the threat of recession as receding?
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