Consumer Price Index December 2025

Understated and conflicted 

• The December 2025 Consumer Price Index (CPI) report delivered the cleanest read on inflation in three months. That said, the downward bias created by the data-collection gap during the government shutdown and the Bureau of Labor Statistics (BLS) carry-forward methodology will continue to distort inflation data through April. As a reminder, the BLS assumed no price change for a wide range of categories in October, including flat rent and owners’ equivalent rent between April and October last year. In addition, the November CPI was collected late in the month, disproportionately capturing seasonal discounting.
   
• Headline CPI rose 0.3% month over month in December, driven by modest increases in energy (+0.3%) and food prices (+0.7%) and mixed data for core prices, up only 0.2%. The core advance was led by higher shelter costs, apparel prices and airfare, but buffered by lower used car prices, flat new car prices and lower auto insurance premiums. As a result, headline inflation and core inflation were flat on the month at 2.7% year over year (y/y) and 2.6% y/y, respectively. We estimate both measures remain roughly 0.3 percentage points below where they would have been absent the government shutdown distortions.
   
• Core goods inflation continues to point to a gradual and uneven pass-through of tariffs, unchanged at 1.4% y/y in December, compared with a normal-times deflationary trend. Meanwhile, core services inflation has been easing, but held at 3.0% y/y. Even if overstated, shelter costs are providing a meaningful offset to tariff-related inflationary pressures elsewhere in the basket.
   
• Short-term inflation dynamics appear exaggerated. On a three-month annualized basis, headline inflation held at 2.1% y/y in December, while core inflation remained flat at 1.6%. On a six-month annualized basis, headline inflation was unchanged at 2.8% while core inflation remained at 2.6%.
   
• There is nothing in this report that would prompt Fed policymakers to step off the pause bench and favor a rate cut at the upcoming Federal Open Market Committee meeting. With the policy rate now within a broad range of neutral estimates, most Fed officials view the current stance as well positioned to wait and assess incoming data.
   
• The more consequential input for monetary policy going forward will be the balance between labor demand and labor supply. While the decline in the unemployment rate to 4.4% offered partial reassurance, reflecting a rapidly falling labor supply, we view the December jobs report as notably soft. The economy added just 50,000 jobs, while downward revisions of 76,000 jobs to prior months’ gains pushed the three-month average of nonfarm payrolls into contraction, at a loss of 22,000 jobs per month. Broader labor market indicators confirm that the labor market is under increasing strain from competing crosscurrents.
   
• While we continue to expect 50 basis points of policy easing in 2026, we believe the Fed will wait at least until June to resume cuts. Fed Chair Jerome Powell’s final rate cut as Chair likely occurred in December 2025. 
   
• Importantly, the recent Department of Justice grand jury investigation involving the Fed and Powell is likely to inject additional uncertainty into the policy process. Policymakers may lean more hawkish to signal institutional independence, while the episode also raises the probability that Powell remains on the Board after his term as Chair ends in mid-May 2026, given that his term as a governor runs through January 2028.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.