Breaking the Inflation Fever
The December 2025 CPI report delivers a clear and encouraging message: the US economy is completing its transition from an era of inflationary turbulence into one of increasing stability and predictability. While the headline CPI increase of 0.3% matched consensus expectations, the deeper implications of the report lie beneath the surface, particularly in the composition and momentum of core inflation. Core CPI, which strips out the volatile food and energy categories, rose just 0.24% for the month, reinforcing the view that underlying price pressures are steadily moderating.
One of the most significant contributors to this improvement is the unmistakable deflationary trend in the goods sector. Prices for used vehicles posted meaningful declines, while new vehicle prices remained flat, confirming that the supply-chain disruptions and demand distortions that once fuelled goods inflation have now unwound. What was once a dominant engine of inflation has become a source of disinflation. This shift provides an essential anchor for overall price stability, particularly as goods prices historically exert outsized influence during inflationary turning points.
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Energy and food remain visible and politically sensitive components of inflation, but their influence is increasingly offset by broader structural forces. The year-over-year decline in gasoline prices not only benefits consumers directly but also reduces cost pressures throughout supply networks, from transportation to manufacturing. These downstream effects amplify the disinflationary impulse now spreading across the economy.
Perhaps a key development for the inflation outlook is the evolving trajectory of shelter costs. While shelter remains a heavy weight within CPI, it is well understood to be a lagging indicator. Market-based rental data throughout the second half of 2025 already point to a pronounced deceleration. As these trends filter into the official index in coming months, they provide what is effectively a “preloaded” decline in future inflation prints.
For the Fed, this inflation report functions as a yellow light, supporting a tactical pause in rate hikes without yet justifying aggressive cuts. Although the 0.24% core reading signals that the era of emergency tightening has passed, headline inflation at 2.7% remains above the Fed’s 2% target, giving policymakers ample reason for patience. Policymakers will likely look past the "hoax" rhetoric and focus on the divergence between cooling goods prices and the "sticky" inelastic costs in food and shelter. As a result, rates are expected to remain steady in the near term as the Fed guards against potential 2026 healthcare premium spikes that could otherwise ignite a secondary inflation wave and threaten long-term credibility.
Taken together, the December data suggest that the inflationary cycle has turned, and that the US economy is entering a more balanced phase… in terms of inflation at least.