December 2025 CPI Data and the 2026 Outlook

The release of the December 2025 Consumer Price Index (CPI) by the Bureau of Labor Statistics (BLS) finally puts a messy economic year behind us. It was a year characterized by interest rate cuts, a brief but disruptive government shutdown, ever changing tariffs and shifting global trade dynamics. Now, the December data provides some clarity to set the stage for 2026.

The results were a mixed bag of stability and localized price shocks: while the annual headline inflation tracked perfectly with expectations, core inflation was  better than expected sending the stock market higher on hopes for quicker rate cuts even as specific sectors like recreation and food saw surprising surges.

Headline CPI: A 0.3% Step to Close the Year

For the month of December 2025, the Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent on a seasonally adjusted basis. On an annual basis, the all-items index rose 2.7 percent before seasonal adjustment, the exact same 12-month increase reported for November. Both were in line with expectations.

The stability of the annual headline number at 2.7 percent is a solid psychological milestone. It represents a steady sideways movement, confirming that the sharp spikes of previous years are largely contained. For the general public, a 2.7 percent inflation rate suggests that while prices are still rising faster than most would like, the rate of ascent has normalized into a range that is manageable, even if it remains slightly above the Federal Reserve’s holy grail 2 percent target.

Core Inflation: Better Than Expected

While the headline number met the mark, the Core CPI, the index for all items less food and energy, stole the spotlight once again. Core CPI rose 0.2 percent for the month, bringing the 12-month core increase to 2.6 percent.

Leading into the release, market expectations had generally pegged the annual core rate at 2.7 percent. By coming in 0.1 percentage points lower than expected for the second month in a row, the December report signaled to the markets that the sticky inflation which plagued the economy throughout early 2025 is finally losing its grip. This trend is particularly encouraging because it suggests that slowing inflation is broadening across the economy, moving from simple supply-chain resolutions into the more persistent service sectors.

The Interest Rate Equation: Hopes for a Pivot

The immediate reaction to the December core results was felt in the bond markets with longer term rates falling a bit, as investors began recalibrating their expectations for the Federal Reserve’s upcoming meetings in early 2026. For much of the fall, the Fed maintained a cautious wait and see approach, but the December data provides the Fed with a crucial piece of evidence.

If inflation is indeed tempering toward 2.5 percent or lower, current nominal interest rates are becoming increasingly restrictive in real terms. Economists argue that if the Fed does not begin to lower rates as inflation falls, the economy risks an accidental hard landing caused by overly tight monetary policy. With two months of better-than-expected core data now in the books, the argument for a rate cut in the first quarter of 2026 has strengthened significantly.

The Hot Spots: Record Recreation and Food Surges

Despite the positive overarching trend, the December report highlights areas where the cost of living remains acutely elevated and it’s in areas that really impact most people.

A Record Spike in Recreation

One of the most startling data points in the December release was the 1.2 percent monthly increase in the recreation index. This was the largest one-month increase ever reported for that index since it was first published in 1993. This surge was driven by heavy demand and pricing shifts in leisure activities as the year came to a close.

Persistent Food and Shelter Pressure

The food index rose a substantial 0.7 percent in December. Both food at home (groceries) and food away from home (restaurants) saw 0.7 percent monthly jumps. Within the grocery store, dairy products (+0.9%) and other food at home (+1.6%) led the way, while egg prices provided a rare reprieve, falling 8.2 percent over the month.

Shelter remained a persistent headwind, rising 0.4 percent in December. As the single largest factor in the all-items monthly increase, shelter’s 3.2 percent annual rise continues to be the primary obstacle to hitting the Fed’s 2 percent goal.

Both of these are a huge problem since while they make up 49% of the CPI calculation impact, they make up more than that for many lower income families which means they’re feeling the sting of inflation a lot more.

Travel and Energy

Energy costs saw a modest 0.3 percent increase, though this masked a sharp 4.4 percent jump in the natural gas index offset by lower gasoline prices and a small slide in electricity(although for the year that’s up by 6.7%). Meanwhile, the airline fares index surged 5.2 percent in December, adding significant costs for holiday travelers.

The Cooler Side: Goods and Communication

Conversely, several key categories provided the downward pull necessary to keep the aggregate index in check:

• Used Cars and Trucks: Fell 1.1 percent over the month.
• Communication: Declined 1.9 percent, led by a 3.3 percent drop in wireless telephone services.
• New Vehicles: Remained unchanged for the month.
• Household Furnishings: Decreased 0.5 percent in December.

This goods disinflation has been the primary driver of the lower core numbers. As global supply chains have normalized, the pricing power of retailers in the goods sector has diminished, forcing many to maintain steady prices to attract cost-conscious consumers.

The Post-Shutdown Muddiness

The BLS explicitly noted that data for October and November 2025 were unavailable for certain comparisons due to the 2025 government shutdown. This lack of data created some noise in the year-end reporting, forcing analysts to rely more heavily on the December snap-shot. However, even with this missing context, the 12-month trendline remains undeniably downward although certain areas like food and shelter and certain spots in energy continue to be elevated

Conclusion: A Year of Progress

As we look back at 2025 through the lens of the December CPI report, the progress is undeniable. We end the year with headline inflation at 2.7 percent, core inflation at 2.6 percent, and a pricing environment that continues to see cooling in broad categories despite localized shocks in recreation and travel.

The December report provides a good scenario for the start of 2026: it is cool enough to justify a shift in Federal Reserve policy, but not so cold as to signal an impending economic collapse. While the battle against high food and housing costs is far from over and that’s a problem for a broad number of people in this economy, the broader inflationary fire has been successfully contained right now.