This week, the Bureau of Labor Statistics (BLS) dropped the December value for the Consumer Price Index (CPI). The CPI rate of inflation (for all goods and services) came in at 0.4 percent over the last month of 2024 (or, about 4.8 percent annualized).
The reading for December is concerning since that means the CPI rate of inflation has ticked up for five consecutive months since July, after declining over the first half of 2024. Figure 1 displays the monthly values of the CPI rate of inflation since January 2023.1
While disheartening, this five-month run of increases probably should not come as a surprise, as the U.S. economy has remained stable if not strong over the past year (as discussed in last week’s post). All the while, too, the Fed has lowered its target interest rate by 100 basis points since September. Such a decline should encourage spending, which is typically associated with an increase in inflation.
In fact, consumer spending, like GDP overall, has been stable over most of 2024. Figure 2 displays the annualized monthly growth rates of inflation-adjusted consumer spending for each month of this past year (through November).
The average growth this year for consumer spending from January to November (the latest reported monthly observation) is about 2.3 percent.2 That average is right in line with the historical average from 2000 to 2020. Yet, over the second half of the year, spending has been stronger, averaging 3.4 percent from May to November.
While the percentage change in consumer spending has been uneven month-to-month (as seen in Figure 2), it is probably not a coincidence that inflation has increased over the same time period.
What then, should we expect for 2025? Like we did with GDP last week, let’s speculate with a forecast (or two).
An Inflation Forecast
Figure 3 displays CPI rate of inflation over the same time period as displayed in Figure 1, along with a six-month forecast (out to June of 2025). To generate the forecast, Macrosight used a similar method as in previous posts (like last week, and in this one).3
The Macrosight forecast suggests the CPI rate of inflation is going to continue to hang around 2.8 percent over the first half of this year. The model predicts a 3-plus rate for January since the past two months have been above 3 percent (on an annualized basis). But the model predicts the rate will converge back just-below-3 percent by February.4
The Fed’s Perspective (the PCEPI versus the CPI)
The CPI rate of inflation for December is the most recent data point we have on inflation. The Fed, however, likes to focus on the rate of inflation as measured by the Consumer Expenditure Price Index (PCEPI) (explained in detail here by Macrosight). How does the latest CPI data align with the Fed’s expectations for inflation?
Figure 4 displays a snapshot of the Federal Reserve’s latest forecast for the PCEPI rate of inflation (which they label as PCE inflation).
By the end of 2025, the Fed expects the PCEPI rate of inflation to be 2.5 percent.
To assess that number, Macrosight produced its own forecast of the PCEPI (using the same approach as for the CPI). Figure 5 displays the PCEPI rate of inflation since 2023 along with Macrosight’s forecast for this price index for the first six months of 2025.
The average value of the PCEPI rate of inflation for 2024 was a bit below the average for the CPI rate of inflation (2.9 percent as shown in Figure 3). Similarly, Macrosight’s forecast for the PCEPI rate of inflation is just a bit below Macrosight’s forecast for the CPI (as shown in Figure 3). Lastly, Macrosight’s PCEPI forecast for the first half of 2025 is the same as the Fed’s end-of-2025 value (2.5 percent).
Now what?
Where does this information leave us as we embark upon 2025? Both the Fed’s forecast for the PCEPI, and Macrosight’s forecasts for the CPI and the PCEPI provide a kinda-sorta “the glass if half full” view of inflation. In spite of the recent couple of months’ data on inflation—which may be perceived as foreboding in a “the-glass-is-half-empty” kind of way—the inflation rate is projected to remain steady for 2025.
While the projected values of 2.8 and 2.5 percent for the CPI and PCEPI, respectively, are both above what the Fed is seeking (2.0 percent), those elevated values are not necessarily too surprising. Historically inflation is persistent, which helps explain why the disinflation that has been occurring since the middle of 2023 is taking some time, and will likely continue to do so into 2025.
Values shown are annualized using the simple method of multiplying the monthly percent change by 12. The “official” way to annualize a monthly value is to use the formula = (((currentmonth/lastmonth)^12)-1)*100. Ultimately, the annualized number under both methods will be very close (4.7 under the “simple” method, 4.8 under the “official” version—the latter of which is referred to as a “compounded annual rate of change”). Macrosight prefers the simple version for annualization since it is intuitive for the less-mathematically-inclined, and the official version tends to create disproportionately-skewed values when monthly changes are unusually large.
The observation for December 2024 will be released by the Bureau of Economic Analysis at the end of January 2025.
The inputs for the forecasting model were past four months’ values of inflation. The weights for the inputs were estimated from data on the CPI rate of inflation spanning January 2000 through December 2024.
The first “weight” in the Macrosight forecasting model is a value of 0.58. That means that the CPI inflation value for December of 4.7 is multiplied by 0.58. That gives a value of about 2.8. That implies that based on last month alone, the model predicts the rate of inflation for January will be at least 2.8. As mentioned in the previous footnote, the model utilizes the past four months of inflation data, with each month’s inflation value “weighted” by a corresponding number. As also mentioned in the previous footnote, those weights are estimated from the historical data—going back to 2000. The weights, estimated from that history, reveal how strongly connected (or correlated), the past months’ values of inflation are with the current value. Another way of saying that is that the historical data on inflation reveal a pattern in how inflation fluctuates month-to-month. The gist of a forecasting model is to use that historical pattern to forecast the future months.