What signal does the US December CPI send? Wall Street has no expectations for a rate cut this month, and the "new Fed mouthpiece" says the Fed's wait-and-see stance is unlikely to change.

What signal does the US December CPI send? Wall Street has no expectations for a rate cut this month, and the "new Fed mouthpiece" says the Fed's wait-and-see stance is unlikely to change.

In December, the growth rate of the U.S. core CPI was lower than Wall Street’s expectations, and the year-on-year increase was the lowest in nearly five years. Market analysts believe this is a more convincing signal that price pressures are cooling, but it is still insufficient to prompt the Federal Reserve to cut rates this month.

Nick Timiraos, chief economics reporter at The Wall Street Journal—regarded as the “new Fed Whisperer”—commented that the December CPI report is unlikely to change the Fed’s wait-and-see attitude, as officials likely want to see more evidence that inflation is stabilizing and then falling before cutting rates. He noted,

To resume rate cuts, Fed officials may need to see new evidence that labor market conditions are weakening or price pressures are easing. The latter may require at least a few more months of inflation reports for confirmation.

Ellen Zentner, chief economist at Morgan Stanley Wealth Management, said: “We've seen similar situations before—inflation hasn't re-heated but remains above target. Tariff transmission remains limited, but housing affordability hasn’t improved. Today’s inflation report didn’t provide the Fed with the conditions needed to cut rates later this month.”

After the release of the data, stock index futures and U.S. Treasury yields initially rose, but volatility eased as the trading session progressed. The Bloomberg Dollar Spot Index was little changed. Expectations that the Fed would leave rates unchanged at its late-January policy meeting became even stronger. During Tuesday’s U.S. session, data from CME showed that futures markets now see just over a 97% chance that the Fed will keep rates unchanged at its January 27–28 meeting, up from 95.6% the day before.

Core Inflation Lower Than All Mainstream Forecasts

According to Tuesday data from the U.S. Bureau of Labor Statistics (BLS), core CPI—excluding volatile food and energy—rose 0.2% month-on-month in December, compared to economists’ consensus expectations of 0.3%. Core CPI was up 2.6% year-on-year, matching November’s lowest level since March 2021, and economists expected a 2.7% rise.

Media reports noted this data provides a more convincing signal that inflation is on a downward path. Last November’s report was complicated by statistical issues: due to a record-length government shutdown, BLS could not collect price data in October, and assumed key housing metrics did not rise. November’s data was also collected later than usual and might have been affected by holiday discounts.

Overall CPI rose 0.3% month-on-month and 2.7% year-on-year in December, both in line with economists’ expectations. BLS stated that housing costs were the “biggest factor” driving the month-on-month rise in overall CPI: this category rose 0.4% month-on-month in December, the largest increase in four months. Excluding housing, core CPI rose only 0.1%.

Olu Sonola, head of U.S. economic research at Fitch Ratings, said in a report: “While the impact of the government shutdown on the data hasn’t been fully eliminated, the key positive in this report is flat core goods prices, which reinforces the view that tariff transmission to consumers has been much milder than expected.”

Declines in Car and Furniture Prices Offset Housing Cost Increases

Breakdown data shows car prices helped drag down core CPI inflation in December. Used car prices fell 1.1% month-on-month, while new car prices were unchanged. Household goods prices dropped 0.5%, also restraining core inflation. Vehicle repair costs saw a record largest decline. Excluding food and energy, core goods prices were flat in December, also lower than expected.

However, for voters concerned about living costs, multiple categories still flashed warning signals. Grocery prices rose 0.7% month-on-month, the largest increase since 2022. Recreational prices surged 1.2%, the highest monthly gain on record. Home insurance costs rose 1% month-on-month and soared 8.2% year-on-year, also a record.

Bloomberg Economics’ economists Anna Wong, Chris G. Collins, and Troy Durie said: “The December CPI report shows the understatement in November’s CPI was milder than thought. The real signal is that tariff transmission may have peaked.”

Reports noted that some tariff-sensitive categories such as apparel saw price increases. But household goods prices dropped 0.5%, as President Trump’s threatened extra tariffs on industry imports have eased. Energy prices rose 0.3% month-on-month and 2.3% year-on-year, but gasoline prices fell by 0.5% and 3.4%, respectively.

Fed Still Needs More Evidence to Support Rate Cuts

Timiraos pointed out that despite last year’s stall in disinflation, the Fed cut rates at its last three meetings, most recently in December 2025, lowering the federal funds target rate to 3.5%–3.75%. Rate cuts have been driven by concerns that labor market weakening could be sharper than expected. The Fed’s next policy meeting is scheduled for the end of January.

Currently, the market widely expects Fed officials to hold rates at this month’s FOMC meeting. Officials are split over the extent of further rate cuts this year, needing to balance above-target inflation with labor market weakness. Trump’s tariff policies have made this balancing act more complex, though most Fed policymakers believe the inflationary impact of tariffs is temporary.

The Fed closely watches another services sector metric—“super-core” CPI inflation, which excludes housing and energy costs. In December, super-core CPI rose 0.3% month-on-month; year-on-year, it was 2.7%, versus around 4% a year ago. Chris Low, chief economist at FHN Financial, said this improvement in inflation should create room for the Fed to cut rates further this year.

Capital Economics’ economist Stephen Brown wrote in a report: “After unusually weak price changes in certain areas in October and November, we’re seeing some rebound, but the surprise slowdown in core prices for December suggests underlying inflation pressures have indeed eased in recent months.”

Reports indicated that, after accounting for December price increases, real wages were flat month-on-month, and up 1.1% year-on-year. This figure has been positive for the past two and a half years, meaning that on average, Americans’ wage growth has outpaced price increases. However, stubbornly high living costs have depressed consumer confidence indices.

Looking ahead to 2026, economists expect high inflation to gradually ease. Kathy Bostjancic, chief economist at Nationwide, said Tuesday that “the CPI report is very encouraging,” and it “supports our view that the tariff impact on goods prices will fade by 2026.”

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