U.S. headline inflation held steady in December, while underlying price pressures showed signs of easing, reinforcing expectations that inflation is gradually cooling.
Consumer prices increased by 2.7% year on year in December, while monthly inflation rose by 0.3%. Both figures matched November’s readings and aligned with economists’ forecasts, indicating no acceleration in overall price growth.
Excluding volatile components such as food and energy, the so-called core Consumer Price Index reported by the Labor Department came in at an annual rate of 2.6%, with a 0.2% monthly increase. These figures were unchanged from November and came in slightly softer than market expectations.
According to Stephen Brown, deputy chief North America economist at Capital Economics, the softer core reading points to genuine moderation in inflation trends. He noted that the downside surprise came despite price rebounds in some categories following unusually weak movements in October and November, suggesting underlying inflation pressures have eased in recent months.
The data strengthens the case for the Federal Reserve to keep interest rates unchanged at its upcoming policy meeting later this month. Markets are widely expecting policymakers to maintain rates in the 3.50% to 3.75% range. According to CME FedWatch, there is a roughly 95% probability that borrowing costs will remain steady following the January 27–28 meeting.
The Fed cut interest rates several times last year as it sought to support a cooling labor market, even as inflation remained above the central bank’s 2% target. Now, officials are divided over the next steps, with some warning that additional rate reductions could reignite price pressures.
While lower interest rates can stimulate investment and employment, they also risk pushing inflation higher. Investors are currently pricing in two additional rate cuts in 2026, although uncertainty remains over the exact timing of any further easing.
