Inflation remained stubbornly above the Federal Reserve's 2% target to close out 2024, with core prices holding steady at 2.8%, according to Commerce Department data released Friday. The personal consumption expenditures (PCE) price index, the Fed's preferred inflation gauge, increased 2.6% year-over-year in December, rising from November's 2.4% reading.

Excluding volatile food and energy prices, core PCE climbed 0.2% on a monthly basis and remained at an annual rate of 2.8% for the third consecutive month. Both figures aligned with economists' expectations.

The report comes just two days after the central bank voted to hold interest rates steady in the 4.25%-4.5% range. Fed officials have signaled a cautious approach to rate cuts in 2025, with policymakers waiting for clearer signs that inflation is on a sustained path toward 2%.

"There is still more work to be done to bring inflation closer to our 2 percent goal," Fed Governor Michelle Bowman said Friday. "I would like to see progress in lowering inflation resume before we make further adjustments to the target range."

Energy and Consumer Spending Drive Inflation Higher

Energy costs were a primary driver of December's inflation uptick, rising 2.7% for the month. Food prices edged up 0.2%, while durable goods saw deflation, falling 0.4%. Nondurable goods increased 0.5%.

Meanwhile, consumer spending surged 0.7% in December, outpacing expectations of a 0.5% gain. Analysts attributed the rise in part to a late Thanksgiving that shifted more holiday shopping into December, as well as replacement purchases following major hurricanes in October.

"Purchases of TVs, technology products and autos have notably surged," Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, wrote in a note to clients. He suggested that consumers may also be front-loading purchases in anticipation of import tariffs proposed by President Donald Trump.

Trump has reiterated plans to impose a 25% tariff on imports from Canada and Mexico, a move economists warn could significantly raise prices. "Consumers shop with an eye on bargains, and 25% tariffs ... could force prices of store-bought goods well beyond the reach of many," said Chris Rupkey, chief economist at FwdBonds.

Rising Wages, Falling Savings Raise Concerns

Personal income rose 0.4% in December, while the employment cost index, a measure of wages and benefits, increased 0.9% in the fourth quarter, in line with expectations. On an annual basis, compensation growth slowed to 3.8% from 3.9% in the prior quarter.

Despite higher wages, Americans are saving less. The personal savings rate fell to 3.8% in December, its lowest level in two years and well below the pre-pandemic average of 5.8%.

"It now is 2 percentage points below its 2015-to-19 average," Tombs noted, adding that consumers are increasingly relying on credit cards to sustain spending. The share of Americans making only minimum credit card payments hit a 12-year high in the third quarter, according to the Federal Reserve Bank of Philadelphia.

"It's an orange flag," Gregory Daco, chief economist at EY-Parthenon, told CNN. "We're noticing that there is a bifurcation in the consumer outlook, with lower- and middle-income households becoming more cautious in this high-price, high-interest-rate environment."

Fed Faces Policy Crossroads as Inflation Risks Rise

While inflation has cooled significantly from its 2022 peak, the path toward the Fed's 2% target remains uneven. December's report underscores the challenge for policymakers as they navigate rate decisions in 2025.

"Inflation is still firmly above the Federal Reserve's 2% target," said Clark Bellin, chief investment officer at Bellwether Wealth. "While Friday's PCE print was in-line with expectations, the data shows that inflation remained elevated in December to end 2024, making it somewhat ironic that the Federal Reserve cut interest rates during the same month."

Some economists warn that inflationary pressures could rise further under Trump's policy agenda, particularly if tariffs disrupt supply chains and push up import costs. "As we look further out, you might start to see the pressures from some of the policies that are put in place-immigration restrictions, perhaps some deregulation, and tariffs, of course, are big, big unknowns," Daco said.

Fed Chair Jerome Powell has indicated that the central bank will take a wait-and-see approach. "Inflation remains elevated," Powell said Wednesday. "But the labor market is solid, and the economy is strong, so the central bank doesn't have to hurry more rate cuts."