The journey to disinflation appears to have stalled a bit. In their latest report, the Bureau of Labor Statistics announced that inflation increased 0.4% on a seasonally adjusted basis in December, bringing it to 2.9%, after rising 0.3% in November. (As a reminder, the Federal Reserve’s goal is to reach a flat 2%.)
The “core” Consumer Price Index (CPI), which measures inflation with volatile categories like food and energy stripped, paints a more optimistic picture: It rose 3.2% in December, after consistently rising by 3.3% for the last three months. The Fed will meet in two weeks to determine whether its current strategy on federal interest rates is working — or whether they will need to delay future interest rate cuts.
“The underlying inflation trends look very healthy,” said Julia Coronado, a former Fed economist and president of MacroPolicy Perspectives, to the Wall Street Journal. “If it weren’t for these policies that look to be inflationary, I would think that the Fed would have reason to be pretty confident.”
What, exactly, is hampering this process? Before we get into all that — and what it all means for you — let’s talk about how inflation works.
First: How is inflation measured?
Inflation is the upward creep of the prices of goods and services. It usually happens because the demand for goods and services is rising faster than companies can produce and supply them. That makes them more scarce, which makes them more valuable, which pushes prices up. When wages don’t rise to match, that creates a decrease in purchasing power. (Translation: Things cost more and you’re not making more, so you can’t buy as many things.)
Inflation is often measured using a standard benchmark called the Consumer Price Index (CPI), which you might have heard of. The CPI is calculated by looking at a standard set (“basket”) of goods (food, medical care, clothing, etc) and averaging their change in price over time.
There’s also a measure called “core inflation,” which is basically all that stuff, minus food and energy prices. It can be easier to judge what’s really happening in the economy when you exclude them, because food and energy tend to be more volatile, driven by short-lived factors, and just overall less reflective of economic health.
And the last measure to know about is called Personal Consumption Expenditures (PCE). It’s a bit broader than the CPI and weighs some things like health care a bit more heavily. It’s also the measurement that the Federal Reserve considers the most when they make policy decisions.
What drove December 2024’s inflation numbers?
Eggs, eggs, eggs. An outbreak of avian influenza — aka bird flu — is responsible for the largest increase for any grocery item on the CPI. Egg prices rose 3.2% from November to December, a significant change whose impact you’ll feel at the grocery store checkout. Analysts have referred to egg prices as a ““swing factor” when it comes to inflation.
The other major factor? Energy prices. According to the Bureau of Labor Statistics (BLS), energy prices “rose 2.6 percent in December, accounting for over forty percent of the monthly all items increase.”
That’s a major share of the CPI. And you probably also felt that at the pump. Gasoline prices rose by 4.4%. Relatedly, car insurance rose by 11.3% (here’s our explainer on why car insurance prices have been so difficult to drive down).
There are, however, other, more optimistic indicators. “The shelter index increased 4.6 percent over the last year, the smallest 12-month increase since January 2022,” reports the BLS. As the largest category in the CPI, shelter is another swing factor, with major impact on the trajectory of overall inflation.
How should you manage your money right now?
It’s impossible to know what will happen in the future, especially right now, but here are some things to think about.
Don’t keep more than you need to in cash
This is something we say anyway — but when inflation is high, cash gets less valuable, so the advice becomes even more urgent. Here’s what we recommend always keeping in cash (as in, in an FDIC-insured bank account):
Money to pay your bills
Your emergency fund (three to six months’ worth of take-home pay)
Savings for short-term goals (things you’ll need money for in the next one to two years)
If you’re the kind of person who tips a little more toward “cautious” on the risk tolerance scale, you could consider adding a bit more to your emergency fund — if things are going to cost more later, your savings might not go quite as far.
But for the rest of your money, we typically recommend investing it.
Shop around for the best interest rates on savings
Higher federal interest rates lead to higher interest rates paid by savings accounts. If you have a large chunk of cash in the bank (like a complete emergency fund, for example), see if you can find a savings account paying more.
Keep investing regularly
If you’re investing for long-term goals (those more than a few years away), we’d probably recommend that you just keep doing what you’re doing. Every period of inflation is different, and in the past, it’s affected different types of investments in different ways (which is, after all, the point of having a diversified portfolio).
We do know (and as we’ve seen this year) periods of economic uncertainty tend to make the markets nervous, which can lead to volatility. So we recommend using a technique called dollar-cost averaging, which means investing regularly, a little bit at a time, no matter what’s going on in the market. You’ll end up investing when markets are up and down in a way that evens out over time. It takes the timing guesswork out of it.
TL;DR: We don’t know if inflation will continue to slow toward the Fed’s goal. All we can do is try to make the best choices we can with the information we have — and adjust along the way.