The cost of living rose more in December than the month prior, as rising energy costs hurt household budgets and stoked inflation. However, "core" prices were cooler, providing some hope for lower inflation in the coming months. 

The Consumer Price Index, a measure of the cost of living, rose 2.9% over the year in December, up from 2.7% in November. The index hit its fastest annual pace since July, the Bureau of Labor Statistics said Wꦿednesday.

According to a survey of economists by Dow Jones Newswires and The Wall Street Journal, prices rose 0.4% monthly, slightly higher than the 0.3% consensus forecasters had expected. Energy costs, especially a 4.4% increase in the cost of gas 𒅌over the month, accounted for more than 40% of the overall increase.

Inflation is Cool at the Core

Setting prices for food and gas aside, "core" prices rose more slowly, going up 0.2% over the month (3.2% over the year) after three consecutive months of 0.3% increases. The measure undershot the median forecast for another 0.3% increase to a 3.3% annual jump. Economists and policymakers look at core prices to gauge the trajectory of inflation since food and gas prices can fluctuate for reasons that have little to do with longer-term inflation trends.

Cooler core inflation not only directly helps household budgets, but it could revive hopes for lower interest rates on credit cards and other loans later this year. The Federal Reserve is widely expected to keep interest rates steady next time the Fed's policy committee meets in January after cutting rates at its last three meetings. However, the Fed could cut rates later in the year if core inflation continues to cool toward the central bank's goal of a 2% annual rate.

“After recent red-hot data, today’s softer than expected core CPI reading should help cool fears of a reacceleration in inflation," Tina Adatia, head of fixed income client portfolio management at Goldman Sachs Asset Management, wrote in a commentary. "While today’s release is likely insufficient to put a January rate cut back on the table, it strengthens the case that the Fed’s cutting cycle has not yet run its course."

As of Wednesday morning, financial markets were pricing in a 15% chance the Fed would not cut rates by the end of the year, down from 26% the day before according to the CME Group's FedWatch tool, which forecasts rate movements based on fed funds futures trading data.