US CPI inflation showed further signs of cooling in December, reinforcing expectations that price pressures are gradually easing even as the Federal Reserve remains cautious about its next policy move. According to data released Tuesday by the Bureau of Labor Statistics (BLS), core consumer prices, which exclude volatile food and energy costs, rose 0.2% on the month and 2.6% on an annual basis, both readings coming in below market expectations by 0.1 percentage point.
The softer-than-expected core inflation print strengthened market confidence that underlying price pressures are moderating after years of elevated inflation. Federal Reserve officials closely monitor core CPI as a more reliable indicator of long-term inflation trends, making December’s data particularly significant as policymakers assess whether past rate cuts are gaining traction.
On a headline basis, the Consumer Price Index (CPI) increased 0.3% in December, bringing the annual inflation rate to 2.7%, both exactly in line with consensus forecasts. While headline inflation remains above the Fed’s 2% target, the combination of slowing core inflation and stable headline prices suggests progress toward price stability, though not yet enough to declare victory.
Shelter and Services Keep Inflation Sticky Despite Cooling Trend
Despite the encouraging core inflation miss, the report highlighted areas where price pressures remain persistent, most notably housing costs. The shelter index, which accounts for more than one-third of CPI weighting, rose 0.4% in December and was up 3.2% year over year, making it the single largest contributor to the monthly increase. Economists continue to view shelter inflation as a key obstacle to a faster return to the Fed’s inflation target.
Other service-related categories also showed strength. Recreation prices surged 1.2%, the largest monthly increase for that category since records began in 1993, while airfares and medical care costs also climbed. Food prices rose 0.7% on the month, although notable relief came from egg prices, which fell 8.2% in December and nearly 21% from a year earlier after sharp prior gain.
At the same time, several goods categories showed outright deflation. Used car and truck prices declined 1.1%, communication services dropped 1.9%, and new vehicle prices were flat. Household furnishings prices fell 0.5%, helped by reduced tariff pressures after President Donald Trump stepped back from proposed import hikes in that sector.
Markets React: Stocks Rise, Yields Fall as Rate Cut Hopes Stabilize
Financial markets responded swiftly to the CPI report. US stock futures moved higher, reflecting investor relief that inflation is not re-accelerating, while Treasury yields declined, signaling lower near-term inflation risk and reduced pressure for tighter monetary policy. The reaction suggests that markets interpreted the data as supportive of economic stability rather than a trigger for renewed Fed tightening.
However, the report is unlikely to prompt immediate policy action. The Federal Reserve cut interest rates three times in late 2025, and policymakers are widely expected to remain on hold through at least the first half of 2026 as they evaluate the cumulative impact of those cuts. Fed officials continue to balance risks to the labor market against the possibility that inflation remains stubbornly above target.
As Morgan Stanley Wealth Management’s chief economic strategist Ellen Zentner noted, the report confirms that inflation is easing but not fast enough to justify near-term rate cuts. Policymakers also remain cautious about the inflationary impact of trade tariffs, though most Fed officials currently view those effects as temporary rather than structural.
Overall, December’s CPI report strengthens the case for a “wait-and-see” Federal Reserve, offering reassurance that inflation is moving in the right direction, while underscoring that the final stretch back to the 2% target may take time.
