December Inflation Data Shows Continued Cooling, With Persistent Pressure in Key Categories

Inflation Edges Lower, but Not to Target

The Bureau of Labor Statistics reported that consumer prices rose 2.7 percent year over year in December. Core inflation, which excludes food and energy, increased 2.6 percent annually. On a monthly basis, headline prices rose 0.3 percent, while core prices increased 0.2 percent.

Both core readings came in slightly below market expectations. Economists and policymakers tend to focus on core inflation as a clearer indicator of long-term pricing trends, since food and energy prices can fluctuate sharply month to month.

While the December data supports the view that inflation is cooling, it remains above the Federal Reserve’s stated long-term goal of 2 percent.

Shelter Remains the Largest Contributor

Shelter costs continued to be the single largest contributor to inflation in December. The shelter index rose 0.4 percent for the month and was up 3.2 percent compared with a year earlier. Shelter represents more than one-third of the total CPI weighting, making it a significant driver of overall inflation levels.

Measures within shelter, including rent and owners’ equivalent rent, continued to reflect higher housing costs even as other goods categories showed more modest movement.

Food Prices Rise, With Mixed Signals Inside the Category

Food prices increased 0.7 percent in December, marking one of the stronger monthly gains in the report. However, movement within the category was uneven.

Egg prices fell sharply during the month and were down nearly 21 percent year over year, reversing earlier spikes tied to supply disruptions. At the same time, prices for food away from home and several grocery subcategories continued to rise, contributing to the broader increase in the food index.

Goods Show Signs of Deflation

Several goods categories showed declining prices in December. Used car and truck prices fell 1.1 percent during the month, while the communication index declined 1.9 percent. New vehicle prices were flat.

Household furnishings also declined, falling 0.5 percent. This category has been sensitive to trade policy and import costs, and the December decline followed the administration’s decision to step back from previously proposed tariff increases affecting certain imported goods.

Services and Recreation See Notable Increases

Services inflation remained firm. Medical care prices increased, and airfares moved higher during the month. Recreation prices rose 1.2 percent, the largest monthly increase recorded for that index since tracking began in 1993, according to the BLS.

These service-sector increases contributed to the persistence of core inflation even as goods prices softened.

Financial Markets and Policy Context

Following the release of the December CPI report, stock futures moved higher and Treasury yields declined, reflecting investor confidence that inflation is continuing to ease.

The report arrives as Federal Reserve officials assess the impact of interest rate cuts made in late 2025. Policymakers have emphasized the need to balance inflation risks against potential labor market weakness, with most signaling a pause as they evaluate incoming data.

Tariffs remain a complicating factor in the inflation outlook. Policymakers have generally characterized tariff-related price increases as temporary, though certain categories continue to reflect some pass-through effects.

Where Things Stand Now

December’s inflation data reinforces a familiar pattern. Price growth is slowing, but not evenly across the economy. Goods deflation and easing energy costs are helping offset continued pressure in shelter, food, and services. As 2026 begins, inflation remains lower than its peak but still above the levels that defined the pre-pandemic environment.

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