US Core CPI Eases, Sparking Speculation of March Fed Rate Cut

US inflation showed a welcome slowdown in December, as the core Consumer Price Index (CPI)—which excludes volatile food and energy costs—rose 0.2%, below expectations of a 0.3% increase. This marks the first decline in the rate of core inflation in six months and has reignited hopes that the Federal Reserve could cut interest rates as early as March 2025.

Market Reactions
Treasury yields dropped sharply, while the S&P 500 gained at the open and the dollar weakened, reflecting increased optimism among investors. This was the first CPI report of 2025, and with President Donald Trump’s inauguration approaching, markets are keenly focused on how his trade and fiscal policies might impact inflation moving forward.

Key metrics:
Core CPI (month-over-month): +0.2% (vs. +0.3% expected).
Headline CPI (month-over-month): +0.4%.
Core CPI (year-over-year): +3.2% (vs. +3.3% expected).

Drivers of the Slowdown
The deceleration in core inflation was attributed to:
- Cheaper hotel stays.
- Smaller increases in medical care services and rental prices.
- More subdued gains in goods prices, including new and used cars.
Despite the promising data, economists cautioned that the Federal Reserve would likely wait for additional soft inflation readings and signs of weakening in the labor market before considering a rate cut.

Seema Shah, Chief Global Strategist at Principal Asset Management, noted:

“If today’s print is followed by another soft CPI reading next month and a weaker payrolls report, a March rate cut could be back on the table.”

Economic Outlook
The December CPI data reflects cooling inflation but leaves questions about how long the trend will last. Trump’s policies, particularly on tariffs, are expected to add inflationary pressure in the months ahead.

Meanwhile, economists expect the Fed’s preferred inflation measure—the personal consumption expenditures (PCE) price index—to show similar progress when it is released later this month.

What’s Next?
​With the Fed’s next meeting scheduled for January 28-29, policymakers are unlikely to cut rates immediately but may signal openness to easing later in the year. Investors will keep a close eye on upcoming inflation reports and labor market data to gauge the Fed’s trajectory in 2025.