Core U.S. consumer prices rose less than expected in December, boosting hopes for a slowdown in inflation as the Federal Reserve considers its next interest rate decision.
Excluding volatile food and energy prices, the consumer price index showed a seasonally adjusted gain of 0.2% on a monthly basis and 2.6% year-over-year, the Bureau of Labor Statistics reported Tuesday. Both were 0.1 percentage points below expectations. Although they look at both measures, Fed officials view core inflation as a better long-term indicator of where inflation is heading.
In general terms, the CPI rose 0.3% for the month, bringing the overall annual rate to 2.7%. Both were exactly in line with the Dow Jones consensus estimate.
The Fed targets inflation at 2% per year, so the report provides evidence that the pace of price increases is returning to target but remains high.
Stock market futures rose following the report while Treasury yields were lower.
Housing, a key component of the stickiness, rose 0.4%, making up the largest item in the monthly increase, according to the BLS. The category accounts for more than a third of the CPI’s weighting and grew 3.2% on an annual basis.
Other parts of the report also show that inflation persists.
Food prices jumped 0.7% on the month, while egg prices fell 8.2% and almost 21% from last year after previously soaring. Other areas that saw increases included leisure, airfares and medical care.
Some tariff-sensitive categories, including clothing, also saw gains. However, the furniture sector saw a decline of 0.5%, as President Donald Trump abandoned his threats of tariff increases on imports in this sector.
The 1.2% increase for leisure was the largest monthly increase for the index since 1993, the BLS said.
The report likely keeps the central bank on hold, at least for now. Policymakers cut their benchmark rate three times at the end of 2025, and markets expect them to remain unchanged until the first half of the new year, as they assess the impact of these cuts on overall economic conditions.
“We’ve seen this movie before: Inflation isn’t warming up, but it’s still above target,” wrote Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management. “Tariffs still have only a modest impact, but housing affordability isn’t thawing. Today’s inflation report doesn’t give the Fed what it needs to cut interest rates later this month.”
Fed officials are currently weighing risks to the labor market against the possibility of persistent inflation. Trump’s tariffs have added another difficulty to the equation, although most policymakers consider the impact on inflation to be temporary.
Some areas of the report, notably goods, showed signs of deflation. Used cars and trucks fell 1.1% and the communications index fell 1.9%. Prices of new vehicles remained stable.
Tuesday’s release brings the BLS up-to-date on inflation and employment after the government shutdown last year caused a suspension of data collection and reporting.
