Recent government data suggest that inflationary pressures in the US may be easing — a development closely watched by policymakers, economists, markets, and everyday consumers alike. The Consumer Price Index (CPI) — the US government’s primary measure of price changes on goods and services — held at a lower level than many expected, reinforcing evidence that inflation is moderating after years of elevated prices.
Inflation Holds at Lower Levels
According to the US Bureau of Labor Statistics (BLS), the CPI — which tracks prices paid by urban consumers — rose 0.3% in December 2025 on a seasonally adjusted basis. Over the past 12 months, inflation increased 2.7%, the same annual pace recorded in November.
Notably, the “core” CPI — which strips out volatile food and energy prices — rose 2.6% over the same period, slightly below economists’ forecasts and the prior reading. This metric is often considered a better indicator of underlying inflation trends.
This data suggests that, while prices are still rising, the pace of inflation is cooling from the highs seen earlier in the post-pandemic period.
What Is Driving the Moderation?
A variety of factors are helping moderate inflation:
- Shelter costs — one of the largest components of the CPI — continued to rise but at a more measured pace, contributing less to headline inflation than in prior years.
- Energy prices remained relatively stable, with smaller increases in natural gas offsetting declines in gasoline.
- Core inflation cooling — reflected in the below-forecast rise, indicates that price increases in services and nondiscretionary goods are slowing.
The fact that core inflation — often a key focus for central bankers — came in below expectations gives policymakers additional confidence that price pressures may be easing.
Consumer Expectations and Sentiment
Inflation isn’t just a statistical measure — it’s also shaped by what consumers expect prices to do in the future. According to the University of Michigan’s monthly consumer sentiment survey, inflation expectations for the next year fell to around 4.0%, the lowest level since early 2025, while longer-term expectations also edged down slightly. Survey director Joanne Hsu noted that the improvement in sentiment was “broad based” across income, age, and political groups, even as many households still feel the impact of higher prices on their budgets.
What This Means for the Federal Reserve
The Federal Reserve — which has its dual mandate to foster price stability and maximum employment — watches CPI data closely when setting monetary policy.
The recent CPI figures, with inflation maintaining a pace closer to the Fed’s long-run target of 2%, reduce some of the pressure on policymakers to raise interest rates further. At the same time, inflation has not fallen far enough below target to trigger aggressive rate cuts. The Fed is also navigating complications from last year’s government data disruptions, which have made some economic readings harder to interpret with precision.
In practice, this means the Fed is likely to hold interest rates steady in the near term while waiting for a clearer picture of inflation trends before taking additional action.
Broader Economic Context
Moderating inflation comes amid a broader economic landscape that includes:
- Robust consumer spending, which continued into late 2025 despite inflation pressures.
- Mixed labor market signals, with strong employment on paper but some signs of cooling wage growth.
- Global price dynamics, as inflation in other advanced economies also shows signs of slowing.
Taken together, the data point to a US economy that is balancing slower price growth with ongoing consumer demand, a combination that may allow continued growth without significant overheating.
The Bottom Line for Americans
For everyday households, the latest CPI report suggests that:
- Price increases are still happening, but at a slower and more predictable pace.
- Categories like shelter and food continue to be key drivers of price changes, which can affect household budgets most directly.
- A cooling inflation trend could help stabilize living costs over time and ease policymakers’ concerns about runaway prices.
While inflation has moderated significantly from pandemic-era peaks, the path back to pre-pandemic price levels — where CPI hovered closer to 2% annually — remains gradual and uneven across sectors. Consumers, markets, and the Fed will continue watching future CPI releases closely for signs that inflation is moving firmly into a sustainable long-term pattern.
