Inflation has been around since the days of Alexander the Great, and it's not showing any signs of going away.
In combating this pesky problem, the Federal Reserve uses interest rates as a primary tool to control inflation.
Related: Surprising December retail sales report upends inflation bets
When inflation is too high, the Fed typically raises interest rates to slow the economy and bring inflation down. Conversely, when inflation is too low, the Fed usually lowers interest rates to stimulate the economy and increase inflation.
On Dec. 18, the central bank announced its third and final interest rate cut of the year, reducing its benchmark Federal Funds Rate by 0.25 percentage points to between 4.25% and 4.5%.
Analysts have been reviewing recent economic data and considering its possible impact on the Fed's next move.
The U.S. Commerce Department pegged its headline Consumer Price Index for December at an annual rate of 2.9%, accelerating from the 2.7% pace recorded in November and reaching the highest level since July.
So-called core inflation, which strips out volatile components like food and energy, fell for the first time in six months to an annual rate of 3.2%, beating Wall Street's forecast and pegging the reading at its lowest in more than three years.
Analyst sees more moderate pace for 2025
In addition, the producer price index rose 0.2% in December, the Bureau of Labor Statistics said on Jan. 14, less than the 0.4% increase in the previous month and below the consensus estimate of 0.4%.
CME Group's FedWatch tool suggests the Fed will hold rates steady at 4.375% when it meets later this month in Washington. The odds of the first rate cut of the year are set up for the central bank's meeting in May.
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Bets on a follow-up move in September are essentially up in the air, with the odds increasing modestly over the final two meetings of 2025.
"Last year was an impressive year for equity markets, and we believe forward momentum will continue this year but at a more moderate pace," said Adam Turnquist, chief technical strategist for LPL Financial.
"History seems to agree, as following year returns after years that were closely correlated to 2024 produced average gains of 6.2%," he added.
Applying this average to the S&P 500’s Dec. 31 close equates to a year-end target of about 6,250, nearly in line with the firm's 2025 fair value target range forecast for the S&P 500 of 6,275 to 6,375, he said.
The S&P 500 closed Friday at 5,96.66, up 59 points and up 2,9% for the week.
On a shorter-term basis, Turnquist said the Jan. 15 relief rally produced some technical progress, with the S&P 500 recapturing support at 5,860 but closing just shy of the 50-day moving average at 5,958, a reference to the calculated average price of the index over the past 50 trading days. By Friday, the index was trading at 0.5% above its 50-day moving average of 5,968.
Traders and analysts often use this average to identify potential trends and support levels in the market.
"A close above this area of resistance, accompanied by an improvement in market breadth metrics, would be a good sign the latest round of selling pressure could be over," Turnquist said.
Impact of new administration remains to be seen
"Until then, we continue to believe there is risk for a potentially deeper pullback toward the July highs or even the 200-DMA," he added.
Bank of America Securities analysts said the December core CPI inflation came in below expectations at +0.2%. The firm’s economists estimate this data implies a relatively benign +0.14% month-over-month for the December core PCE.
Related: Bank of America makes surprising pivot on interest rates
This would be the second low inflation print in a row, following +0.11% month-over-month core PCE reading for November, the firm said.
The lower expected inflation implies a goldilocks economy, at least for now, of strong growth and moderate inflation, BofA said.
In addition, the second benign inflation print in a row reduces the risk of Fed hikes, BofA said, which was the biggest risk weighing on investor demand recently, helping push spreads a few bps wider so far in January
BofA said that prior to the CPI print, the impact of higher rates on spreads was moderate because the bar for hikes remained high, which means the bullish impact of today's data should also be limited.
"Moreover, the impact of the upcoming Trump administration on growth and inflation remains to be seen, with uncertainties still wide," the firm said. "Finally, markets continued to price just over one Fed cut over the next 12 months.
"The S&P 500 treaded water for much of the first half of January on concerns that the march higher in the 10-year yield was an indication that the Federal Reserve (Fed) would be less likely to cut short-term rates anytime soon due to a sticky inflation outlook," said CFRA chief investment strategist Sam Stovall.
What's more, Stovall added, the S&P 500 set a cautious technical tone by posting a closing low that undercut last December's low.
"Since WW II, this scenario resulted in the likelihood of a full-year price increase that was no better than a coin toss — only 50% of the time — with the average return being a decline of 0.2%," he said.
Stovall said the small undershoot in the December Core Consumer Price Index added confidence to softer-than-expected PPI of a continued easing in overall inflation.
"We still forecast CPI readings to moderate in 2025, freeing the Fed to cut rates at least twice this year and to allow the 10-year yield to approach the 4.10% area by year end."
Related: Veteran fund manager issues dire S&P 500 warning for 2025
