The U.S. Consumer Price Index (CPI) climbed 2.7% year-over-year in December, matching market expectations and holding steady from November's reading. While the headline figure suggests stability, the underlying dynamics reveal an inflation picture that remains stubbornly elevated as we enter 2026.

Ofo's take: "December data confirms that U.S. inflation remains stable but elevated, with risks skewed toward a midyear uptick that could test the Fed's resolve on rate policy."

December CPI breakdown

The latest inflation data paints a nuanced picture of price pressures across the economy:

  • Headline CPI: Rose 2.7% year-over-year, unchanged from November and in line with market expectations.
  • Core inflation: Excluding food and energy, prices increased 2.6% over the past year—slightly below the 2.7% consensus forecast.
  • Monthly headline: CPI rose 0.3% month-over-month, matching projections.
  • Monthly core: Edged up just 0.2%, coming in slightly below expectations.

2025 closes with stable but sticky inflation

December's data confirms that the U.S. closed 2025 with inflation that remained remarkably stable throughout the fourth quarter, though still elevated above the Federal Reserve's 2% target. The persistence of price pressures, particularly in services and shelter costs, continues to challenge the narrative of a swift return to pre-pandemic inflation levels.

Key observations from the December report:

  • Services inflation: Remains the primary driver of elevated core readings.
  • Shelter costs: Continue to exert upward pressure despite signs of cooling in real-time rent data.
  • Goods deflation: Provides some offset, but its disinflationary contribution may be fading.
  • Energy volatility: Remains a wildcard for headline readings in the months ahead.

2026 outlook: A midyear test

Looking ahead, we expect both headline and core CPI to edge higher in the coming months, potentially peaking around midyear before moderating. Our base case sees inflation ending 2026 near 3%—still meaningfully above the Fed's target.

Several factors support this outlook:

  • Base effects: Favorable comparisons from early 2025 will fade, potentially pushing year-over-year readings higher.
  • Wage pressures: Labor market resilience continues to support consumer spending and services inflation.
  • Policy uncertainty: Potential tariff implementations and fiscal policy shifts could add to price pressures.
  • Housing lag: The delayed pass-through of market rents to CPI shelter components may keep core elevated.

Implications for the Fed

The recent trend suggests that, while inflationary pressures remain contained for now, the road ahead could challenge the Federal Reserve's commitment to balancing growth and price stability. A midyear uptick in inflation readings would likely:

  • Limit rate cut expectations: Markets may need to further reduce expectations for monetary easing in 2026.
  • Test Fed credibility: The central bank's resolve to maintain its inflation-fighting stance will be scrutinized.
  • Increase volatility: Fixed income markets could see heightened sensitivity to inflation data surprises.
  • Support the dollar: Higher-for-longer rate expectations typically bolster currency strength.

Bottom line

December's CPI report confirms that U.S. inflation has settled into a stable but elevated equilibrium. While the lack of acceleration is reassuring, the persistence of above-target readings—and the risk of a midyear uptick—suggests the Fed's inflation battle is far from over. Investors should prepare for a year where inflation remains a central theme, with potential implications for rate policy, asset allocation, and market volatility.