Inflation Cools Further in December as Price Pressures Continue to Normalize

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The December 2025 Consumer Price Index report confirms that U.S. inflation continued to moderate at the end of the year, reinforcing the view that price pressures are easing in an orderly and sustained manner. While monthly price increases remained firm, the broader inflation trend points to gradual normalization rather than renewed acceleration. The data suggest that restrictive monetary policy is maintaining downward pressure on inflation without generating abrupt disinflation or destabilizing economic conditions. Headline inflation advanced modestly in December. The Consumer Price Index for All Urban Consumers rose 0.3 percent on a seasonally adjusted basis during the month. On a year-over-year basis, the all-items CPI increased 2.7 percent, matching the pace recorded in November and remaining well below the elevated rates seen earlier in the post-pandemic period. Although inflation remains above the Federal Reserve’s long-run target, the sustained deceleration from previous peaks signals continued progress in the disinflation process. Core inflation, which excludes the volatile food and energy categories, also showed signs of moderation. The index for all items less food and energy rose 0.2 percent in December. This relatively subdued monthly increase suggests that underlying price pressures are no longer broad-based, even as certain service related components remain firm. Core inflation dynamics continue to be shaped primarily by shelter costs, while price momentum elsewhere in the economy has softened. Shelter inflation remained the dominant contributor to monthly price increases. The shelter index rose 0.4 percent in December, accounting for the largest share of the overall CPI gain. This category continues to reflect the delayed pass-through of earlier increases in market rents and home prices. While shelter inflation remains elevated relative to pre-pandemic norms, the pace of increase has slowed compared with earlier periods, reinforcing expectations that housing-related inflation will continue to ease gradually over the coming year. Food prices accelerated in December, contributing meaningfully to the monthly increase in headline inflation. The food index rose 0.7 percent during the month, with both food at home and food away from home recording identical gains of 0.7 percent. Over the past twelve months, food prices increased 2.6 percent, indicating that food inflation has moderated substantially from the sharp increases experienced in prior years. Within food at home, price movements were mixed. The index for meats, poultry, fish, and eggs declined 0.2 percent in December, driven largely by an 8.2 percent drop in egg prices. On a year-over-year basis, however, this category still rose 3.9 percent, underscoring lingering cost pressures in certain food supply chains. Other food-at-home categories showed more moderate increases over the year, including a 2.7 percent rise in “other food at home” and a 5.1 percent increase in nonalcoholic beverages. In contrast, dairy and related products declined 0.9 percent over the past twelve months. Food away from home remained an area of persistent inflation, reflecting ongoing labor cost pressures in the service sector. The index increased 4.1 percent over the year, with full-service meals rising 4.9 percent and limited-service meals increasing 3.3 percent. These figures highlight the continued sensitivity of service prices to wage dynamics, even as broader inflation trends cool. Energy prices rose modestly in December, adding to monthly inflation but not materially altering the broader disinflation narrative. The energy index increased 0.3 percent during the month. Within the category, gasoline prices declined

Inflation Cools Further in December as Price Pressures Continue to Normalize Source: The Bureau of Labor Statistics 0.5 percent on a seasonally adjusted basis, while natural gas prices rose sharply, increasing 4.4 percent. On a year-over-year basis, energy prices increased 4.2 percent, reflecting volatility rather than sustained upward momentum. Despite recent energy price strength, energy’s contribution to overall inflation remains uneven and secondary to shelter and services. Beyond food and energy, price changes across other categories were relatively contained. Several goods categories continued to experience limited inflation or outright declines, reflecting easing supply constraints and weaker demand for discretionary items. This pattern reinforces the view that goods inflation, once a major driver of post-pandemic price pressures, is no longer a significant source of upward momentum. Taken together, the December CPI report points to an inflation environment that is cooling gradually rather than rapidly. Monthly price increases remain positive, but the pace is consistent with a controlled disinflation path rather than renewed overheating. Importantly, inflation progress has been achieved without a collapse in demand, suggesting that monetary tightening is exerting its intended effect. From a policy perspective, the December data support a cautious but patient stance by the Federal Reserve. Inflation has moved meaningfully lower, but shelter inflation and service sector price pressures indicate that the final leg of disinflation may take time. Policymakers are likely to view the current inflation trajectory as encouraging, yet insufficient to justify a rapid shift toward policy easing. Holding interest rates at restrictive levels remains consistent with the goal of ensuring inflation returns sustainably to target. For households and businesses, the report delivers a nuanced message. Price pressures are no longer eroding purchasing power at the pace seen before, but inflation has not fully normalized. Food and housing costs remain elevated relative to historical standards, while energy prices continue to introduce volatility. Planning decisions will therefore continue to be shaped by a combination of easing inflation and still-tight financial conditions. Looking ahead, the trajectory of shelter inflation will remain central to the overall outlook. As rental market conditions adjust and the effects of higher interest rates continue to filter through housing markets, shelter inflation is expected to decelerate further. If this occurs alongside continued moderation in wage growth and stable energy prices, core inflation should continue trending lower over the course of 2026. In sum, the December 2025 CPI report confirms that U.S. inflation is moving in the right direction, albeit at a measured pace. Headline inflation held at 2.7 percent year over year, monthly increases remained contained, and underlying price pressures showed further signs of easing. While risks remain, particularly in shelter and service-related inflation, the data support a view of ongoing normalization rather than renewed instability. Upcoming week: This week features a concentrated set of policy signals, housing data, and macroeconomic releases that will help investors assess the momentum of the U.S. economy and the balance between growth and inflation as the new year unfolds. While the calendar is lighter than in some weeks, several events carry meaningful implications for financial markets, particularly through expectations for interest rates, energy prices, and risk sentiment. On Wednesday, markets will focus on a combination of political, energy, and housing developments. A speech by U.S. President Trump will be closely watched for any comments on economic policy, trade, fiscal priorities, or energy strategy, as such remarks can quickly influence market sentiment, currencies, and sector-specific equities. The IEA Monthly Report will also be released, providing updated forecasts for global oil demand and supply conditions. This report is especially relevant for energy markets, as revisions to demand growth or supply balances can affect crude oil prices and energy-related assets. On the macro side, Pending Home Sales for December will offer insight into near-term housing market activity, as this indicator tracks contract signings and tends to lead existing home sales. Construction Spending for October will add further context on investment in residential, commercial, and public construction, helping gauge the strength of fixed investment and its contribution to economic growth. On Thursday, attention shifts decisively to growth and inflation data with the release of third quarter GDP and related components. The GDP report will provide a comprehensive view of economic performance, capturing contributions from consumption, investment, government spending, and trade. Alongside GDP, Core PCE Prices and headline PCE Prices for the third quarter will be closely analyzed as key measures of inflation that the Federal Reserve monitors when assessing price stability. Real Consumer Spending will also be released, offering deeper insight into household demand and the sustainability of economic growth. Together, these data points will shape expectations around the pace of economic expansion and the likelihood of policy adjustments in the months ahead. On Friday, the Fed’s Balance Sheet update will draw attention from bond and currency markets, as changes in asset holdings can signal shifts in liquidity conditions and the broader stance of monetary policy. In addition, the CFTC reports on speculative net positions in gold and crude oil will provide valuable insight into market positioning and investor sentiment in key commodity markets. These reports help identify whether traders are increasingly bullish or cautious, which can influence short-term price dynamics and volatility. Overall, this week will clarify whether strong growth momentum is being sustained alongside manageable inflation pressures. Robust GDP and consumption data may support equities but could also reinforce expectations for tighter financial conditions if inflation remains elevated. Developments in energy markets and policy signals from political leadership add another layer of uncertainty, making this a week where markets may remain sensitive to both data surprises and headline risk. For the full list of indicators, please refer to the table on the right.