CNN
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Recently, progress on inflation appeared to be stalling or, at worst, reversing: A closely watched indicator of underlying price increases – an index that excludes highly volatile categories – had not moved in months.

It came loose on Wednesday.

The closely watched core measure of the consumer price index slowed for the first time in months, according to Bureau of Labor Statistics data released Wednesday. That reading, coupled with some better-than-expected wholesale inflation data coming in on Tuesday, sparked optimism in markets.

US stocks rose on Wednesday morning as the CPI report boosted traders’ hopes that the Federal Reserve will continue its interest rate cutting campaign this year. The Dow rose nearly 700 points in morning trading, while the S&P gained 1.69% and the Nasdaq Composite gained 2%.

The CPI measures price changes for commonly purchased goods and services

Overall, the consumer price index rose more than expected, up 0.4% from November and up 0.2 percentage points to an annual rate of 2.9%. However, the monthly increase was largely due to gasoline and food prices.

Energy prices, particularly gas and fuel costs, accounted for 40% of the total monthly increase. Food prices also remained elevated as key staples such as meat and eggs continued to face pressure from weather and disease.

Food and gas are two of the most visible and common causes of consumer inflation. And when prices rise in areas where people — especially low-income Americans — spend most of their monthly budgets, that’s a daunting proposition.

In the context of inflation measurements, energy and food are two of the most volatile categories and can fluctuate widely due to factors that are unique in nature.

Excluding energy and food, the closely watched core CPI indicator slowed for the first time in months, rising just 0.2% from November and falling to 3.2% after remaining at 3.3% since September 2024.

“Markets reacted positively this morning for good reason: the Federal Reserve is comfortable with headline CPI rising temporarily if that rise does not spill over into core CPI, and that is exactly what happened in December,” said Eugenio Aleman, chief economist for Raymond James wrote in a note published Wednesday.

Economists expected inflation to pick up 0.3% from November and reach an annual increase of 2.8%, largely on expectations of higher energy and food prices. FactSet’s consensus estimates were that the core economy would slow on a monthly basis, but remained stable at 3.3% for the year.

Wednesday’s report marked the final CPI reading for 2024 and the last before President Joe Biden hands the keys to President-elect Donald Trump.

While the causes of this recent surge in inflation were varied and largely related to the Covid-19 pandemic and its fallout, the sharp rise in prices hit Americans hard and proved to be a deciding factor at the ballot box.

Prices for everyday items are 21% higher than in 2021. (Over a typical four-year period, prices tend to increase by almost 10%, BLS data shows).

Wages have risen faster than inflation for 20 months, the latest BLS data shows; However, they remain below the level of four years ago.

Inflation has slowed significantly since peaking at 9.1% in June 2022. However, the return to more typical inflation rates was expected to be very bumpy, and this volatility was clearly felt in 2024.

The CPI was at 3.1% last year, rising sharply in March – a rise that is feared to be a re-acceleration – keeping interest rate cuts off the table but ultimately short-lived. Consumer price inflation slowed to just 2.4% in September, but as the last three months have shown, the road back to normality is not smooth.

And while markets welcomed the data because it could feed into the Fed’s fight against inflation and a future cut in high interest rates, that doesn’t change the fact that “this was a particularly painful report” for American consumers, noted Robert Frick, corporate economist at Navy Federal Credit Union.

“The cost of essential goods straining household budgets, particularly for lower-income Americans, was among the main reasons for the rise in inflation in December,” he wrote. “These include higher prices for food, both at restaurants and grocery stores, energy, housing and vehicle insurance.”