New inflation data for December showed prices remain sticky, potentially keeping the Fed on hold at its rate meeting later this month.
Excluding volatile food and energy prices, the “core” consumer price index (CPI) was 2.6% in December, a tenth of a percentage point lower than the 2.7% forecast. However, 2.6% was the same as from September to November and still close to the Fed’s 2% target.
“We’ve seen this movie before – inflation has not re-heated but remains above target,” said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management. “Today’s inflation report does not provide the Fed with the information it needs to cut interest rates later this month.”
However, the collection process after last fall’s government shutdown may have skewed the data because the Bureau of Labor Statistics had to make certain assumptions for October and November, which affected comparisons with December data. It is worth noting that the housing index rose 0.4% in December, which was the biggest factor pushing up inflation last month. But the BLS actually assumed zero rental inflation in October, and the data may be inflated after November’s rental inflation looked lower than expected.
Even if exaggerated, housing costs are offsetting price increases from tariffs, EY-Parthenon chief economist Gregory Daco wrote in a note. Core goods inflation continued to point to the gradual and uneven pass-through of tariffs, with inflation unchanged at 1.4% in December compared with price declines in normal times.
“There is nothing in this report that would prompt Fed policymakers to stop pausing and support a rate cut at the upcoming FOMC meeting,” Darko wrote. “While we continue to expect policy to ease by 50 basis points in 2026, we believe the Fed will not resume rate cuts until at least June.”
Read more: December CPI breakdown: High food prices, especially beef prices continue to rise
New York Fed President John Williams said late Monday that he was optimistic about economic growth prospects in 2026 and expected inflation to peak in the first half of the year before falling to just below 2.5% by the end of the year. He said he expected the tariffs to have a largely “one-off” impact on prices that would be fully realized this year.
Williams reiterated that the Fed’s benchmark policy rate is close to neutral following three interest rate cuts late last year. He pointed out that interest rates are currently in a good position to both support the job market and reduce inflation, which means that the central bank can currently stabilize interest rates within the current range of 3.5%-3.75%.
