US core inflation cools to 2.6% in December, easing pressure on the Fed

Core consumer prices rose 0.2% month-on-month and 2.6% annually, undershooting forecasts as markets recalibrate Fed rate expectations.

• Core US consumer prices rose 0.2 percent in December, below market expectations
• Inflation met forecasts: 0.3% monthly, 2.7% annually.
• Shelter costs rose 0.4 percent, remaining a key driver of inflation

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Core US consumer prices rose less than expected in December, offering fresh evidence that inflation pressures are moderating as the Federal Reserve weighs the timing of its next interest-rate decision.

Excluding food and energy, the consumer price index increased 0.2 percent on a seasonally adjusted monthly basis and 2.6 percent from a year earlier, the Bureau of Labor Statistics reported on Tuesday. Both readings were 0.1 percentage point below market expectations, according to CNBC.

Headline inflation meets forecasts

On a headline basis, consumer prices rose 0.3 percent in December, pushing the annual inflation rate to 2.7 percent. Both figures matched consensus estimates compiled by Dow Jones.

The Fed’s inflation target is 2 percent annually. While the latest data suggest price growth is moving closer to that goal, inflation remains above target.

Why core inflation matters to the Fed

Federal Reserve officials track both headline and core inflation, but typically view core measures as a better indicator of underlying price trends. The softer-than-expected core reading strengthens the case that earlier rate hikes are continuing to work through the economy.

Financial markets reacted quickly. US stock futures rose after the data, while Treasury yields edged lower, reflecting expectations that rate cuts remain possible later this year if disinflation persists.

Shelter costs still a sticking point

Shelter inflation, a closely watched component, rose 0.4 percent in December and was the largest contributor to the monthly increase, the BLS said. The category, which accounts for more than one-third of the CPI basket, was up 3.2 percent on an annual basis.

Persistent shelter inflation underscores why the Fed remains cautious, even as broader price pressures show signs of easing.

Compared with early 2023, when core inflation was running above 4%, December’s 2.6 percent reading marks a significant slowdown. However, Fed policymakers have repeatedly signalled they want sustained evidence of cooling before loosening policy.

The December CPI report adds weight to the argument for patience rather than urgency, leaving the central bank’s next move firmly data-dependent.