US Core CPI Rises 2.6% Year-on-Year in December, Below Expectations... Hopes for Easing Inflation

CPI Rises 2.7%, in Line With Expectations
Inflationary Pressure Eases Despite Higher Housing Costs
Rate Hold Likely in January... Focus Shifts to Cut Magnitude This Year

The core Consumer Price Index (CPI) in the United States for December of last year rose at a rate below market expectations. With the core CPI, which reflects the underlying trend in prices, coming in lower than anticipated, there is an assessment that inflationary pressures are somewhat easing.

Shoppers in SoHo, New York. Photo by Bloomberg

According to the U.S. Department of Labor on January 13 (local time), the CPI for December of last year increased by 0.3% from the previous month and by 2.7% compared to the same period a year earlier. This matches both the consensus forecast compiled by Dow Jones and the previous month's rate of increase.

Excluding the highly volatile energy and food sectors, the core CPI rose 2.6% year-on-year, maintaining the same level as the previous month and coming in slightly below the market expectation of 2.7%. The core CPI, which excludes the more volatile food and energy categories, is considered a key indicator for gauging the medium- to long-term trend of inflation.

Breaking down the details, housing costs, which account for one-third of the CPI, recorded the largest monthly increase, rising 0.4% from the previous month and 3.2% year-on-year. Food prices rose by 0.7%, and energy costs increased by 0.3%, meaning that the burden of housing, food, and energy costs all grew. Clothing prices, which are sensitive to tariffs, rose by 0.6%, transportation services by 0.5%, and medical services by 0.4%. In contrast, new car prices remained flat, while used car and truck prices fell by 1.1%, partially limiting the overall increase in prices.

With the headline inflation rate for December matching expectations and the core inflation rate coming in below forecasts, concerns about a potential reacceleration of inflation have somewhat eased. There is also analysis that the Federal Reserve, which is weighing its policy priorities between price stability and a slowdown in the labor market, now has some room for monetary easing this year. The Fed cut interest rates three times last year, totaling 0.75 percentage points, and has signaled one rate cut for this year. As employment slows and high inflation persists, making monetary policy decisions more challenging, the prevailing view is that the Fed is likely to keep its benchmark rate unchanged in January.

However, as the core inflation rate came in lower than expected, market expectations for the extent of future rate cuts remain undiminished. According to CME FedWatch, the interest rate futures market currently reflects the possibility that the Fed will cut its benchmark rate, now at 3.5-3.75% per year, twice starting in June.

Audrey Childe-Freeman, Head of G-10 FX Strategy at Bloomberg Intelligence (BI), said, "At a time when questions are being raised about whether the Fed will cut rates, the softer-than-expected December CPI provides relief to the market," adding, "It also suggests that it is still too early for the Fed to abandon its dovish (monetary easing) stance this year." She further noted, "It is also premature to withdraw the outlook for a Fed-driven weaker dollar in 2026."