Core U.S. consumer prices rose less than expected in December, reinforcing hopes that inflation is under control as the Federal Reserve considers its next move on interest rates.
The Consumer Price Index, which excludes volatile food and energy prices, rose 0.2% on a seasonally adjusted monthly basis and 2.6% on an annual basis, the Bureau of Labor Statistics said Tuesday. Both results were 0.1 percentage points lower than expected.
Fed officials consider both measures, but believe core inflation is a better measure of where inflation is heading over time.
On an aggregate basis, the CPI rose by 0.3% in the month, bringing the annualized rate for all items to 2.7%. Both were exactly in line with the Dow Jones consensus forecast.
The Fed targets inflation at 2% annually, and the report provides some evidence that the pace of price growth is returning to target but remains high.
Stock market futures briefly rose on the news, but U.S. Treasury yields fell. Traders maintained their view that the Fed is likely to hold firm at its meeting later this month and not consider further rate cuts until June, according to CME Group FedWatch indicators.
Shelter, a key component of resilience, rose 0.4%, making it the biggest item with monthly increases, according to the BLS. This category accounts for more than a third of the CPI and grew by 3.2% on an annual basis.
Other parts of the report also showed that inflation continues.
Food prices rose 0.7% over the month, while egg prices fell 8.2%, dropping nearly 21% year-on-year after previously surging. Other areas that have seen increases include recreation, airfare, and health care.
Energy prices rose 0.3% month-on-month and 2.3% year-on-year, while gasoline prices fell 0.5% and 3.4%, respectively.
Some tariff-sensitive categories such as apparel also posted gains. However, home furnishings fell 0.5% after President Donald Trump withdrew his threat to increase tariffs on imports in the sector.
The 1.2% increase in recreation was the index’s largest monthly increase since 1993, according to the BLS.
The report is likely to cause the central bank to put policy on hold, at least for now. Policymakers have cut the benchmark interest rate three times in the second half of 2025, but markets expect it to remain unchanged until the first half of the new year as they assess the impact of the cuts on general economic conditions.
“We’ve seen this movie before. Inflation hasn’t rekindled, but it’s still above target,” said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management. “The pass-through of tariffs is still modest, but the decline in home prices is not over. Today’s inflation report does not provide the Fed with the information it needs to cut rates later this month.”
Fed officials are now weighing the risks to the labor market against the possibility of prolonged inflation. President Trump’s tariffs added another wrinkle to the equation, but most policymakers expect the impact on inflation to be temporary.
The report showed signs of deflation in some areas, particularly the commodity sector. Used cars and trucks fell 1.1%, and the communications index fell 1.9%. New car prices remained flat.
Tuesday’s announcement brought the BLS’ latest information on inflation and employment after data collection and reporting ceased due to last year’s government shutdown.
In a separate report, the BLS said that after accounting for price increases in December, real wages were flat in December, up 1.1% from a year earlier.
