U.S. Inflation Holds Steady in December as Core Pressures Ease

U.S. consumer inflation in December remained unchanged from the prior month, while underlying price pressures cooled slightly, reinforcing expectations that the Federal Reserve will keep interest rates on hold in the near term.

Headline consumer prices rose 2.7% year on year and 0.3% month on month, matching November’s pace and aligning with economists’ forecasts. The steadiness in headline inflation suggested that price growth has stabilized after a volatile period earlier in the year.

More importantly for policymakers, the core consumer price index, which strips out volatile food and energy components, eased modestly. Core inflation came in at 2.6% annually and 0.2% on a monthly basis, both unchanged from November and slightly softer than market expectations.

“The downside surprise to core prices in December occurred despite some payback in certain items following their suspiciously weak price moves over October and November, suggesting that underlying inflation pressures have genuinely moderated in recent months,” said Stephen Brown, Deputy Chief North America Economist at Capital Economics.

The data arrives ahead of the Federal Reserve’s late-January policy meeting, where officials are widely expected to leave interest rates unchanged at 3.50% to 3.75%. Market pricing reflects near certainty of a pause, with CME FedWatch showing a roughly 95% probability that borrowing costs will remain steady.

The Fed cut rates multiple times in 2025 in response to signs of a cooling labor market, even as inflation stayed above its 2% target. Now, debate is intensifying over the next steps. Some policymakers have cautioned that further easing could reignite price pressures, even as lower rates would help support investment and employment.

Investors are currently pricing in two additional rate cuts in 2026, though the timing remains uncertain. With inflation showing signs of moderation but still running above target, the central bank faces a delicate balance between supporting growth and preventing a renewed rise in prices.