The year-on-year growth rate of the U.S. core Consumer Price Index (CPI) for December came in below Wall Street expectations, reaching its lowest level in nearly five years. Market analysts believe this provides a more conclusive signal that price pressures are cooling, yet it remains insufficient to prompt the Federal Reserve to cut interest rates this month.
Nick Timiraos, the chief economics correspondent for the Wall Street Journal often referred to as the "new Fed whisperer," commented that the December CPI report is unlikely to alter the Federal Reserve's wait-and-see posture. He pointed out that Fed officials will likely want to see more evidence that inflation is stabilizing and subsequently declining before considering rate cuts. He indicated that,
To resume interest rate cuts, Federal Reserve officials may need to see fresh evidence indicating that labor market conditions are weakening, or that price pressures are subsiding. Confirming the latter might require at least several more months of inflation reports.
Ellen Zentner, Chief Economist at Morgan Stanley Wealth Management, stated, "We've seen similar situations before—inflation hasn't reaccelerated, but it remains above target levels. The passthrough from tariffs remains limited, yet housing affordability has not improved. Today's inflation report does not provide the Fed with the conditions needed to cut rates later this month."
Following the data release, stock index futures and U.S. Treasury yields initially rose, but the volatility moderated as the trading session progressed. The Bloomberg Dollar Spot Index was largely flat. Expectations for the Fed holding rates steady at its late-January policy meeting were further reinforced. During Tuesday's U.S. trading session, CME Group data showed that futures markets priced in a probability slightly exceeding 97% for the Fed maintaining the current interest rate at the January 27-28 monetary policy meeting, up from 95.6% a day earlier.
Core Inflation Lower Than All Mainstream Forecasts
According to data released Tuesday by the U.S. Bureau of Labor Statistics (BLS), the core CPI, which excludes volatile food and energy categories, increased 0.2% month-over-month in December, below the consensus economist forecast of 0.3%. The core CPI rose 2.6% year-over-year, matching the lowest level since March 2021 recorded in November, and below the economist expectation of 2.7%. Media reports noted that this data provides a more convincing signal that inflation is on a downward path, following complications in the November report due to statistical issues. Because of the record-long U.S. government shutdown, the BLS was unable to collect price data in October and assumed no increase for key shelter metrics. Data collection for November also occurred later than usual and may have been affected by holiday discounts. The headline CPI increased 0.3% month-over-month and 2.7% year-over-year in December, both matching economist expectations. The BLS stated that shelter costs were the "largest factor" in the monthly headline CPI increase, with this category rising 0.4% in December, the largest increase in four months. Excluding shelter, the core CPI rose only 0.1%. Olu Sonola, Head of US Regional Economics at Fitch Ratings, said in a report, "While the impact of the government shutdown on the data is not fully resolved, the key positive from this report is that core goods prices were flat, reinforcing the view that the passthrough of tariffs to consumers has been far more muted than expected."
Falling Auto and Furniture Prices Offset Rising Shelter Costs
Categorized data showed that vehicle prices helped push down core CPI inflation in December, with used car and truck prices falling 1.1% month-over-month and new vehicle prices remaining unchanged. Prices for household furnishings and operations declined 0.5%, also restraining core price increases. Motor vehicle maintenance and repair costs recorded their largest decline on record. Core goods prices, excluding food and energy, stalled in December, also falling short of expectations for a rebound. However, for voters focused on the cost of living, several categories continued to flash warning signs. Food at home (grocery) prices rose 0.7% month-over-month, the largest increase since 2022. Prices for recreation services jumped 1.2% monthly, the highest increase on record. Owners' equivalent rent of residences insurance costs rose 1.0% monthly and surged 8.2% annually, also a record increase. Economists from Bloomberg Economics, Anna Wong, Chris G. Collins, and Troy Durie, stated, "The December CPI report suggests that the underestimation in the November CPI was more moderate than thought. The real signal is that the tariff passthrough may have peaked." Some reports pointed out that prices rose in some tariff-sensitive categories like apparel. However, prices for household furnishings and operations fell 0.5%, as threats of additional tariffs on imports for this sector by the Trump administration eased. Energy prices rose 0.3% month-over-month and 2.3% year-over-year, but gasoline prices fell 0.5% and 3.4%, respectively.
Fed Still Needs More Evidence to Support Rate Cuts
Timiraos noted that despite the stall in the decline of U.S. inflation last year, the Fed has cut rates at its last three consecutive meetings, most recently in December 2025, lowering the federal funds target rate to a range of 3.5% to 3.75%. These cuts were driven by Fed officials' greater concern about the risk of an unexpectedly sharp slowdown in the labor market. The Fed's next policy meeting is scheduled for the end of January. Market consensus currently expects Fed officials to hold rates steady at the FOMC meeting later this month. Officials are divided on the extent of further rate cuts this year, needing to balance above-target inflation against potential labor market weakness. The tariff policies of the Trump administration complicate this balancing actcosa, although most Fed policymakers believe the inflationary impact of tariffs will be temporary. Another services indicator closely watched by the Fed—the "supercore" CPI inflation, which excludes shelter and energy costs—rose 0.3% month-over-month in December. Year-over-year, the so-called supercore inflation was 2.7% in December, compared to around 4% a year ago. Chris Low, Chief Economist at FHN Financial, said this improvement in disinflation should create conditions for the Fed to cut rates further this year. Stephen Brown, an economist at Capital Economics, wrote in a report, "There was some rebound in certain items after unusually weak price movements in October and November, but the downside surprise in core prices in December suggests that underlying inflation pressures have indeed moderated in recent months." Some reports indicated that after accounting for December's price increases, real wages were unchanged for the month and up 1.1% year-over-year. This metric has been positive for the past two and a half years, meaning that, on average, Americans' wage growth has outpaced price increases. However, stubbornly high living costs have weighed on consumer confidence indicators. Looking ahead to 2026, economists expect high inflation to gradually ease. Kathy Bostjancic, Chief Economist at Nationwide, said on Tuesday that the CPI report was "very encouraging" and that it "supports our view that the impact of tariffs on goods prices will fade in 2026."
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