US: Inflation Steadied in December 

Headline CPI inflation was 2.7% year-on-year (y/y) in December, in line with consensus expectations. That maintained the deceleration from the recent high of 3.0% in September.

Food prices were a little hot under the collar in December, up 0.7% month/month (m/m), and 3.1% versus a year ago as food inflation trended higher in 2025. In contrast, energy prices rose a more muted 0.3% m/m, as a drop in gasoline prices partially offset higher natural gas utility costs. Energy prices are up 2.3% y/y.

Beneath the surface, core inflation was slightly cooler than expected, up 2.6% y/y, unchanged from November’s pace. That is a result of a 0.2% month/month (m/m) increase, one tenth lower than expected.

Within the core, goods prices were flat in December, breaking a streak of five reports of gains. The three-month annualized rate of change slowed to just 0.2%.

Price pressures on the services side were a little firmer (+0.3% m/m) as shelter costs accelerated (+0.4% m/m). Costs for lodging away from home rebounded (+2.9% m/m) after weakness through much of 2025. Recreation costs also surged ahead 1.2% m/m – a one-month record – as video services prices surged. Overall core services were up 3% y/y in December, unchanged from November.

Key Implications

Zooming out, inflation remained steady in December. It was encouraging to see core goods prices stand pat after a period of firming. Similarly, core services continued to cool on a trend basis.

Core inflation is tracking slightly cooler than our December forecast, but we still expect the knock-on effects from tariffs will push inflation higher over the coming months. This is likely to lead the Fed to push pause on its interest rate cuts for at least a couple of meetings. Eventually, we expect it to become clearer that the impact of tariffs on prices was a one-time shift, and a new Fed chair is likely to provide a more dovish tilt, leading to 2 additional quarter-point rate cuts mid-year.