At a Glance

  • Excluding volatile food and energy prices, U.S. core inflation rose less than expected in December, confirming the Federal Reserve's recent shift in policy focus toward supporting the labor market rather than suppressing prices.
  • The U.S. Bureau of Labor Statistics (BLS) reported Tuesday that the core Consumer Price Index (CPI) rose 0.2% month-over-month in December and 2.6% year-over-year, with the latter matching a four-year low. The overall CPI, which includes all items, rose 0.3% for the month and 2.7% year-over-year. The BLS said housing costs rose 0.4% month-over-month in December, making it the largest contributor to the monthly increase in the overall CPI.
  • "Soft core CPI inflation indicates reduced upside risks to inflation," said Sonu Varghese, global macro strategist at financial services firm Carson Group. "Lower inflation data will allow the Federal Reserve to continue focusing on labor market risks." Varghese wrote in a report.

In-Depth Analysis

Federal Reserve policymakers, while pointing to fragility in the job market, cut interest rates by 25 basis points three times in a row from September to December last year, lowering the target range for the federal funds rate to 3.5% to 3.75%.

U.S. employers hired fewer workers than expected last month, with nonfarm payrolls increasing by only 50,000, according to data released Friday by the Bureau of Labor Statistics. The unemployment rate edged down to 4.4% from 4.5% in November, but remained above the 4% level seen in January 2025.

"As the labor market cools, employment risks are rising while upside inflation risks have eased," said New York Fed President John Williams. "We must get inflation back to the Federal Open Market Committee's (FOMC) 2% longer-run goal." Williams said in a speech Monday: "Monetary policy is currently in a good position to support labor market stabilization while also pushing inflation back toward the FOMC's goal."

On Tuesday, U.S. President Donald Trump again pressured Federal Reserve Chairman Jerome Powell to lower borrowing costs. Citing lower-than-expected inflation data on social media, he said Powell should cut key interest rates "substantially." Trump has for months called on Powell to reduce the benchmark rate to as low as 1%, arguing that current rates are unnecessarily restraining economic growth.

Since Sunday, the Trump administration has faced criticism from lawmakers in both parties over its investigation into Powell, which they say endangers the Fed's independence. Republican and Democratic senators, as well as several former Fed and Treasury officials, issued statements condemning the Justice Department's investigation into Powell's June congressional testimony regarding the renovation of the Fed's headquarters.

"I haven't seen the case or any charges, but I would say they better come up with something real and serious," Senate Majority Leader John Thune (R-S.D.) said Monday. "This needs to be resolved quickly because the Fed's role and independence in setting the nation's monetary policy must be ensured free from political interference," Thune said, according to The Hill.