07:54 AM EST, 01/17/2025 (MT Newswires) -- Donald Trump's plans to impose tariffs on several countries and remove undocumented immigrants from the US have triggered uncertainty even as the incoming president inherits a solid economy when he is sworn in for a second term on Jan. 20.

Consumer prices rose 2.9% year over year in December, topping November's 2.7% annual gain, the US Department of Labor said in a release on Wednesday. Last month's gain, however, was below the 3.4% increase during the same month a year earlier.

Core CPI, meanwhile, rose by 3.2% on an annual basis in December, below a 3.3% gain in November and a 3.9% increase in December 2023.

The gains in annual rates have been above the Federal Reserve's 2% target, and the progress was enough to allow the Federal Open Market Committee to lower the range for the federal funds rate by 100 basis points in 2024. The question is whether the Fed will need to address concerns about rising inflation by holding rates steady in 2025.

Two rate cuts are expected this year, according to December's Summary of Economic Projections, down from the four projected before the election in September. The CME's Fed Watch tool does not show a significant chance of a rate cut until June.

Fed Chair Jerome Powell said after the FOMC's December meeting that the committee will need to be cautious when lowering interest rates, a message echoed by other Fed officials since the meeting. The FOMC will not preemptively react to the impact of tariffs on inflation and would need to see what legislation is implemented before taking that into consideration, Powell said.

Fed Governor Christopher Waller said in a speech Jan. 8 that if tariffs don't have a pronounced and lasting effect on inflation, they won't affect his view of monetary policy.

"Of course, we need to see what policies are enacted before we can seriously consider their effects," he said.

Still, the Fed's wait-and-see approach does not extend to consumers' outlook. The University of Michigan's preliminary January sentiment report showed a significant uptick in inflation expectations for the one-year horizon to 3.3% from 2.8% in December. The five-year inflation outlook rose to 3.3% from 3%.

The central bank takes inflation expectations seriously because they can lead to actual inflation if consumers pull forward purchases as a result. The Fed's recent comments have suggested that inflations remain "well-anchored," but that was before the Michigan release.

A strong labor market supported patience by the Fed in considering rate reductions. December employment data released Jan. 10 showed nonfarm payrolls increased by a stronger-than-expected 256,000 and the unemployment rate fell to 4.1%, confirming that the labor market is not in danger of collapse in the near term.

The leisure and hospitality sector saw a gain of 43,000 jobs in December, while construction payrolls rose by 8,000. Those two sectors are among the most likely to be affected if Trump's promises to target undocumented immigrants are enacted.

Consumption has also been solid in 2024, running behind the post-pandemic surge but still contributing positively to economic growth. The Department of Commerce on Thursday said retail sales rose by 0.4% in December and were up 3.9% from the same month a year earlier.

For 2024, retail sales were up 3% from the previous year and rose 3.1% excluding vehicle sales. The non-store retail sector that includes internet sales was particularly strong, rising by 8.2% from 2023. Personal consumption expenditures rose by 3.7% in Q3, the most recent data available, above a 2.8% gain in Q2 and the fastest pace of growth since Q1 2023. Data for Q4 and the full year will be available next month.

While many sectors of the economy have been resilient, there are some soft spots.

The national manufacturing sector has continued to struggle in 2024, with the main activity index from the Institute for Supply Management remaining below its breakeven point in each of the last nine months to indicate ongoing contraction. Manufacturing payrolls have declined in four of the last five months as businesses attempt to streamline their labor costs and ramp up automation.

The Trump administration's tariff plans are meant to boost US output to replace a reduction in foreign production, but the impact on factory employment may be more muted if automation is used to boost productivity.

The real estate sector saw some improvement last year as mortgage rates declined, but a recent upturn in interest rates fueled by concerns that the FOMC will be hesitant to cut borrowing costs and may even consider an increase at some point in 2025 has had a negative impact on mortgage applications.

One upside for the real estate sector in the coming year is an expectation of reduced regulation for home building under the new administration, which should add to the supply of homes for sales, lowering prices to provide some offset for higher mortgage rates.