New inflation reading likely to keep Fed on hold this month

A fresh inflation reading for December showing that prices remain sticky is likely to keep the Federal Reserve on hold at its interest rate meeting later this month.

The Consumer Price Index (CPI) for December on a “core” basis, which excludes volatile food and energy prices, clocked in at 2.6%, a tenth of a percentage point below expectations for 2.7%. However, 2.6% is the same level seen from September through November and remains near the Fed’s 2% target.

“We’ve seen this movie before — inflation isn’t reheating, but it remains above target,” said Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management. “Today’s inflation report doesn’t give the Fed what it needs to cut interest rates later this month.”

The data, however, could be skewed by the collection process following last fall’s government shutdown, because the BLS had to make certain assumptions for October and November, which affected the comparisons to December numbers. Notably, the index for shelter rose 0.4% in December and was the largest factor in boosting inflation last month. But the BLS effectively assumed rental inflation was zero in October, and the reading could be somewhat inflated after appearing cooler than expected for November.

EY-Parthenon chief economist Gregory Daco wrote in a note that even if overstated, shelter costs are offsetting increases in prices from tariffs. Core goods inflation continues to point to a gradual and uneven pass-through of tariffs, unchanged at 1.4% in December, compared with a drop in prices during normal times.

“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 FOMC meeting,” Daco wrote. “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.”

Read more: December CPI breakdown: High food prices, especially for beef, continue to bite

New York Fed president John Williams said Monday night that he’s optimistic about the outlook for economic growth in 2026 and expects inflation to peak in the first half of the year before falling to just under 2.5% to end the year. He said he expects tariffs will have largely “one-off” effects on prices that will be fully realized this year.

Williams reiterated that the Fed is closer to a neutral level on its benchmark policy rate after cutting rates three times at the tail end of last year. He noted that rates are now well positioned to both support the job market and bring down inflation, implying that the central bank is fine to hold rates steady in the current range of 3.5%-3.75% for now.