US inflation firms up in December, keeping Fed in wait-and-watch mode

U.S. consumer price inflation edged higher in December as temporary distortions linked to the government shutdown faded, reinforcing expectations that the Federal Reserve will keep interest rates unchanged at its upcoming policy meeting, according to a report by Reuters.

The Consumer Price Index rose 0.3% in December, in line with economists’ expectations, after inflation readings in previous months were held down by technical factors. On a year-on-year basis, headline inflation stood at 2.7%, unchanged from November. The Labor Department’s Bureau of Labor Statistics also revised its estimate of price increases between September and November to around 0.2%, suggesting a smoother underlying inflation trend than earlier data implied.

The December figures largely confirmed that inflation is neither accelerating sharply nor cooling fast enough to prompt an immediate shift in monetary policy. While price pressures have moderated from their peak, they remain above the Federal Reserve’s long-term target, limiting the central bank’s flexibility in the near term. As reported by Reuters, the data has strengthened market expectations that policymakers will opt for a pause rather than a rate cut this month.


Financial markets reacted cautiously to the inflation report. U.S. equity futures pared earlier losses as investors took comfort in signs that inflation is stabilising rather than reaccelerating. In bond markets, Treasury yields dipped, with the benchmark 10-year yield easing to around 4.17%, reflecting modest relief that inflation did not surprise on the upside. The U.S. dollar also softened slightly, giving up part of its earlier gains as traders reassessed the outlook for interest rates.

Market participants broadly interpreted the data as supportive of the view that inflation is on a gradual downward path, though not yet at levels that would justify an immediate easing of policy. Analysts cited by Reuters noted that the December numbers helped calm fears that inflation would rebound sharply once earlier distortions unwound. Instead, the data suggested a continuation of the slow disinflationary trend seen over recent months.

At the same time, underlying pressures remain visible in areas such as housing costs and trade-related price effects. While the pass-through from tariffs has so far been limited, it continues to contribute to stickiness in certain components of inflation. Housing affordability, in particular, has shown little improvement, keeping shelter-related costs elevated and slowing progress toward the Fed’s target.

Bond investors viewed the CPI data as mildly supportive, especially at the short end of the yield curve, which is more sensitive to expectations around Fed policy. However, as highlighted by Reuters, global factors continue to influence longer-term yields. Rising government bond yields in major overseas markets, including Japan, have added upward pressure on U.S. long-term rates, underscoring that global dynamics remain an important variable for investors.

Looking ahead, economists remain divided on the timing of potential rate cuts in 2026. While December’s inflation report did little to justify an immediate move, it reinforced expectations that easing could begin later in the year if the downward trend in prices continues. Many analysts believe that policymakers will want to see further confirmation from upcoming data, particularly January inflation readings, before signalling any shift in stance.

For now, the December CPI report has provided reassurance that inflation is not reaccelerating, while also underscoring the Federal Reserve’s cautious approach. As Reuters notes, the balance between moderating inflation and persistent price pressures leaves the central bank firmly in wait-and-watch mode, with markets increasingly focused on when — rather than whether — rate cuts will eventually arrive.