Inflation Moderated in December, Latest CPI Report Shows

Key Takeaways

• The annual CPI inflation rate was 2.7% in December, in line with economist expectations and unchanged from November.
• Rising shelter prices drove December inflation, while goods price growth remained subdued.
• Analysts overwhelmingly expect the Fed to keep interest rates as-is at its meeting at the end of the month.

The latest Consumer Price Index report shows that inflation softened modestly in December, conforming November’s trend of slow price growth. “Today’s data adds further support to the notion that inflation is trending down,” says Preston Caldwell, senior US Economist at Morningstar.

The report, released Tuesday by the Bureau of Labor Statistics, showed that inflation rose 2.7% year over year and 0.3% for the month, matching consensus forecasts. Core inflation, which excludes volatile food and energy prices, rose 2.6% on an annual basis and 0.2% month over month—slightly lower than analysts’ expectations and in line with monthly readings from September through November.

Prices for shelter, including rent and housing costs, saw the largest increase across the report’s categories, followed by recreation, airline fares, and medical care. At the same time, goods prices softened in areas such as used vehicles, household furnishings, and appliances.

Still, according to Vanguard senior economist Josh Hirt, the downward trend should be viewed with caution, due to lingering data distortions from last fall’s government shutdown. Given the gaps in the data and December’s mixed jobs report, he expects that the Federal Reserve won’t have enough evidence to cut interest rates at its meeting in a few weeks. “This [report] very much fits with our view that inflation is going to be moderating, but it’s going to be slow. And that’s going to keep the Fed rather cautious this year.”

Shelter Prices Rise While Goods Prices Lull—With Caveats

Elevated shelter prices complicated the picture for December’s otherwise-soft inflation numbers. Vanguard’s Hirt attributes the price increase to a low supply of single-family homes and housing prices that have been slow to adjust to higher interest rates. “Typically, we would see that [interest rates and home prices] would be acting as a bit of a counterbalance. If rates go up significantly, you tend to see some softening in housing prices,” he says. “We just really haven’t seen much of that over the last few years.”

Meanwhile, rent growth continued to decelerate, though the trend is muddied by data gaps. The government shutdown meant the BLS did not collect rental data during October and has continued to cloud shelter pricing data, explains ClearBridge Investments head of economic and market strategy Jeff Schulze. “Shelter inflation showed some strength and will be an area to monitor going forward, since it will continue to be understated until the April CPI release due to the missed sampling window in October,” he says.

Economists say lingering data distortions should also be considered when looking at goods prices. Data collection for November occurred in the second half of the month during heavy holiday discounts, which likely kept prices artificially low. Hirt says goods inflation will likely rebound in the early months of 2026. “If there aren’t any sort of vagaries in the data related to the shutdown that caused this very soft goods number, we would expect [goods prices] to bounce up a pretty good bit in the next report.”

Fed Expected to Maintain Rates

Analysts anticipate that the Fed will hold interest rates at bay at its January meeting, given Tuesday’s subdued inflation figures and December’s mixed jobs report, which showed a slight improvement in the unemployment rate. About 97% of bonds futures traders anticipate no change in interest rates as of Monday morning, according to the CME FedWatch tool. Just 3% of participants expect a quarter-point cut.

While falling unemployment suggests a “firming” of the labor market, Hirt says the Fed will likely wait for clearer evidence of sustained disinflation before acting, particularly with shutdown-related distortions still in play. “We wouldn’t be considering any policy rate action until the March meeting.”