US Inflation and Interest Rates: What the Fed Has in Store for 2025

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US consumer prices saw a modest increase in October, reinforcing the Federal Reserve's need to reconsider its current monetary policy.

The latest data reveals that core inflation is still on the rise, while the annual decline in the Consumer Price Index (CPI) is slowing down, driven by higher costs in housing and other services.

Key Drivers of Rising Consumer Prices: Where Are the Biggest Changes?

The Consumer Price Index (CPI) increased by 0.2% in October, marking the fourth month in a row of gains, driven by rising home prices, including rents, as well as short-term housing, hotels, and motels. This reflects the ongoing resilience of the U.S. cost of living despite the Federal Reserve’s tightening measures.

Food prices also went up, although the rate of growth has slowed since September. The rise in bread, dairy, and fresh fruit prices was offset by drops in meat and fish, resulting in overall inflation remaining steady.

Is Inflationary Pressure Making a Comeback?

Analysts predict higher inflation in the near future if President Donald Trump moves forward with his proposed economic policies, including tax cuts and increased import tariffs.

These measures could drive up prices, particularly amid an unstable labor supply. Economists caution that a significant tightening of immigration policies and a shrinking workforce could lead to higher service costs and production expenses, ultimately impacting consumer prices.

Fed's Game Plan: What Should the Market Brace For?

According to the CME Group's FedWatch Tool, the likelihood of the Federal Reserve reducing its key interest rate by 25 basis points at the upcoming meeting on December 17-18 has surged to around 82.3%.

This marks a sharp increase from the 58.7% probability before the release of October’s inflation data. Meanwhile, the chance of the Fed holding rates steady has fallen to 17.7%, down from 41.3% previously.

With inflation slowing and consumer prices remaining stable, the chances of additional rate cuts in the coming year are gradually diminishing.

The Fed now faces a critical decision: to continue easing policy or take a more cautious approach. Economists at Wells Fargo, for instance, predict that the Fed may shift to a slower pace of rate cuts beginning in 2025.