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 less than market expectations. With the core CPI, which reflects the underlying trend of prices, coming in lower than anticipated, there are assessments 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 last year increased by 0.3% from the previous month and by 2.7% compared to the same period a year earlier. These figures are in line with both the expert forecasts compiled by Dow Jones and the previous month’s growth rates.

The core CPI, which excludes the volatile energy and food sectors, rose by 2.6% year-on-year, maintaining the same level as the previous month and slightly below the market forecast of 2.7%. The core CPI is regarded as a key indicator for gauging the medium- to long-term trend of inflation, as it excludes the highly volatile food and energy components.

Breaking down the details, housing costs-which account for one-third of the CPI-rose by 0.4% from the previous month, marking the largest increase among the components. On an annual basis, housing costs climbed by 3.2%. Food prices rose by 0.7%, and energy by 0.3%, indicating that the burden of housing, food, and energy costs all increased. Clothing prices, which are sensitive to tariffs, rose by 0.6%, while transportation services increased by 0.5% and medical services by 0.4%. In contrast, new car prices remained flat, and used car and truck prices fell by 1.1%, partially limiting the overall rise in prices.

With the latest CPI release, headline inflation for December met expectations, and core inflation came in below market forecasts, easing concerns that inflation could reaccelerate. There is also analysis suggesting that the Federal Reserve (Fed), 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 implemented a total of 0.75 percentage points in rate cuts over three occasions last year and has signaled one additional cut for this year.

The market expects an even more accommodative path. According to CME FedWatch, the current interest rate futures market reflects the possibility that the Fed will cut the benchmark rate, which is currently at 3.5-3.75% per year, twice starting in June. However, with the combination of a weakening job market and persistent inflation making monetary policy decisions more challenging, the prevailing view is that the Fed is likely to keep rates unchanged in January.

Audrey Childe-Freeman, Head of G-10 FX Strategy at Bloomberg Intelligence (BI), stated, "At a time when questions are being raised about whether the Fed will cut rates, a milder-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 (accommodative) stance this year." She further noted, "It is also premature to withdraw the outlook for a Fed-driven weaker dollar in 2026."