Has Inflation Peaked? Some Key Consumer Prices Rose Less Than Expected in December

Key Takeaways

• Inflation was cooler than expected in December as prices for used cars fell, driving down the overall inflation rate.
• However, food prices rose at their fastest pace in more than three years.
• Tariffs hurt less than expected, with prices for goods other than food and energy staying flat for the first time since May.

A key measure of inflation rose less than expected in December, offering some relief to household budgets strained by years of steep cost-of-living increases.

The Consumer Price Index rose 2.7% in December, the Bureau of Labor Statistics said Tuesday. That was the same annual increase as in November and matched forecaster expectations according to a survey of economists by Dow Jones Newswires and The Wall Street Journal. However, the core reading, which excludes the volatile prices for food and gas, rose 2.6% over the year, coming in less the median forecast for 2.8%.

What This Means For The Economy

More tame inflation reports could clear the way for the Federal Reserve to lower interest rates to help the faltering job market.

Inflation is still running above the Federal Reserve's goal of a 2% annual rate, but flat inflation is an improvement over 2025. The annual CPI reading climbed between April and September of last year, with economists largely attributing the price hikes to President Donald Trump's tariff campaign.

"Americans have waited for a long time since the pandemic, and now they’re starting to get relief on prices," David Russell, global head of market strategy at TradeStation, wrote in a commentary.

The details of the report had mixed news for household budgets despite the overall cooling inflation. A 1.1% monthly drop in used car prices and flat prices for new cars helped keep the overall inflation rate from rising. Filling up those cars costs less too, as gas prices fell 0.5%.

Tariff Impact Muted So far

Another bit of budget-friendly news came from a category called "core goods" which encompasses what can only be described as "stuff" as opposed to services, excluding food and energy. Core goods prices, the category most affected by tariffs, stayed flat for the first time since May after climbing steadily. In the pre-tariff era, core goods prices typically stayed flat or fell.

"Goods prices were very benign, which underscore the point that tariffs have had a far more muted impact on inflation than feared," James Knightley, chief international economist at ING, wrote in a commentary. "This is a remarkable story and suggests US retailers are squeezing their profit margins."

Food prices on the other hand, rose 0.7% over the month, the highest increase since September 2022, and shelter prices rose 0.4%, the same as in August and reversing a deceleration in September.

"There were still pockets of rapid price increases in December and little sign that inflation will slow rapidly from here," Scott Anderson, Chief U.S. economist at BMO Capital Markets, wrote in a commentary.

Related Education

Inflation: What It Is and How to Control Inflation Rates

Consumer Price Index for All Urban Consumers (CPI-U)

Tuesday's report was the first in months to be unaffected by the government shutdown in October and November. The BLS and other statistical agencies were mostly closed during the shutdown, so the bureau never released its monthly CPI report for October, and certain data from November was collected later than usual or was missing altogether, leading many economists to take November's data with a grain of salt.

Will Tame Inflation Pave Way For Fed Rate Cuts?

Tuesday's report did little to shift expectations about the Federal Reserve's next moves for its key interest rate, which influences borrowing costs on all kinds of loans. The Fed is still widely expected to keep its rate flat at its next meeting later this month according to the CME Group's FedWatch tool, which forecasts rate movements based on fed funds futures trading data. Fed officials have been debating whether to keep the fed funds rate higher for longer to combat inflation, or lower it to breathe some life into the increasingly shaky job market.

The Fed has lowered its key rate by a quarter-point at each of its last three meetings, although its current range of 3.5% to 3.75% is still at a level that some Fed officials consider high enough to be "restrictive," that is, slowing down inflation and the economy overall.

"Nothing in the December CPI report will change many minds on the FOMC on the inflation outlook, and we believe most will vote for a pause in rate cuts at the January meeting as they await more evidence of progress on the inflation front before continuing to normalize rates," Anderson wrote.

An Independent Fed Takes Center Stage

Further tame inflation reports in the coming months could clear the way for the Fed to cut rates more later in the year.

"With inflation fears fading, officials will feel freer to respond to downside risks to the labor market, should conditions deteriorate," Michael Pearce, chief US economist at Oxford Economics, wrote in a commentary.

However, inflation data, normally highly influential to financial markets, may take a back seat to other factors influencing Fed policy, namely, the Trump Administration's escalating efforts to force the independent central bank to lower rates dramatically.

 "Inflation prints are likely to shift from being a primary market trigger to more of a background constraint as the market becomes increasingly focused on the risks to Federal Reserve independence," Alexandra Wilson-Elizondo, global Co-CIO of multi-asset solutions at Goldman Sachs Asset Management, wrote in a commentary.

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