Consumer inflation surged for the third straight month in December, rekindling concerns that the months-long cooling of price pressures could be over and casting doubt on the Federal Reserve’s ability to steer inflation toward its 2% target.

The headline Consumer Price Index rose 2.9% year-over-year in December, according to Wednesday’s data from the Bureau of Labor Statistics. This marks an increase from November's 2.7% and matches economist forecasts. Notably, it represents the third straight inflation increase and highest annual rate since July 2024.

On a monthly basis, consumer prices increased 0.4%, up from both the previous month's 0.3% gain and the 0.3% predicted by analysts.

The energy index climbed 2.6% in December, contributing to over 40% of the monthly increase in overall prices, with the gasoline index rising 4.4% during the month.

Core inflation, which strips out the volatile food and energy categories, rose by 3.2% on a year-over-year basis, below the 3.3% estimate. Month-over-month, core prices marked a 0.2% increase, matching estimates.

Items that witnessed an increase in December include shelter, airline fares, used cars and trucks, new vehicles, motor vehicle insurance and medical care.

Market Reactions: Yields, Dollar Tumble

Prior to the release of the CPI report, traders priced in one 25-basis-point rate cut by December 2025, according to the CME FedWatch tool.

The mixed December inflation data could keep hopes for more than one rate cut by year-end quite stretched.

Treasury yields tumbled in response to the data, with the policy-sensitive two-year yield down 9 basis points to 4.28%. The U.S. dollar also weakened, with a key index tracking the greenback falling 0.5% during the session.

Equity markets reacted with optimism. Pre-market futures on the S&P 500 rallied 1.5%, while contracts tied to the Nasdaq 100 soared 1.6%.

On Tuesday, the SPDR S&P 500 ETF Trust ( SPY ) inched up 0.1%, while the Invesco QQQ Trust, Series 1 ( QQQ ) declined 0.1%.

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