Inflation Rises Faster Than Expected in December/ Newslooks/ WASHINGTON/ J. Mansour/ Morning Edition/ Inflation accelerated in December, with prices rising 2.9% year-over-year. The Federal Reserve’s preferred PCE index showed the fastest monthly gain since February. Core inflation also climbed, complicating prospects for near-term interest rate cuts.
Inflation Rises Faster Than Expected in December Quick Looks
- Monthly inflation rose 0.4% in December
- Annual inflation increased to 2.9%
- Core inflation climbed 3% year-over-year
- PCE index is the Fed’s preferred gauge
- Price increases seen in groceries, clothing, furniture
- Natural gas prices jumped 3.7% in one month
- Consumer spending rose 0.4% in December
- Fed held interest rates steady at 3.6%
Deep Look: Inflation Rises Faster Than Expected in December
Inflation picked up speed in December, rising more quickly than economists anticipated and highlighting the continued challenge facing policymakers as they attempt to steer prices back toward the Federal Reserve’s 2% annual target.
According to data released by the Commerce Department, prices increased 0.4% in December compared with the previous month — double November’s 0.2% rise and the strongest monthly gain since last February. On a year-over-year basis, inflation reached 2.9%, up from 2.8% in November and marking the largest annual increase since March 2024.
The report reflects the personal consumption expenditures (PCE) price index, the inflation measure preferred by the Federal Reserve. While many Americans are more familiar with the Consumer Price Index (CPI), policymakers rely heavily on the PCE index because it better captures shifts in consumer behavior and provides a broader measure of spending patterns.
Core inflation — which excludes volatile food and energy prices — also accelerated. Core prices rose 0.4% in December from the previous month, up from 0.2% in November. Compared with a year earlier, core inflation reached 3%, rising from 2.8% and posting its fastest pace since February.
Although inflation has cooled significantly from its peak of nearly 7% in 2022, December’s data underscores that price pressures remain persistent. Many everyday expenses are still rising faster than they did before the pandemic, contributing to widespread public frustration despite solid economic growth and a historically low unemployment rate.
The divergence between economic indicators and consumer sentiment remains notable. Growth has held steady and hiring conditions, while moderating, remain stable. Yet higher prices for essential goods and services continue to weigh on household budgets.
One reason the PCE index currently shows firmer inflation than the CPI is methodological. The PCE places less weight on categories where price increases have cooled sharply, such as apartment rents and used vehicle prices. As a result, even though CPI data released earlier showed a more noticeable cooling trend, the PCE index suggests underlying inflation remains somewhat stickier.
December’s report also revealed that consumer spending remained resilient. Americans increased spending by 0.4% from November, matching the previous month’s gain. The steady pace of consumption indicates that households continue to support economic expansion, even in the face of rising prices.
Price increases were broad-based in December. Furniture, clothing, and grocery costs all moved higher. While gasoline prices declined, providing some relief at the pump, energy costs were mixed overall. Electricity prices rose, and natural gas costs surged 3.7% in December alone, adding pressure to household utility bills.
The inflation data presents a delicate balancing act for the Federal Reserve. At its late-January meeting, the Fed’s rate-setting committee opted to keep its benchmark short-term interest rate steady at approximately 3.6%. The decision came despite repeated calls from President Donald Trump urging policymakers to lower borrowing costs.
Minutes from the meeting show that most Federal Reserve officials prefer to see clearer evidence that inflation is moving decisively closer to the 2% target before considering additional rate cuts. Persistent core inflation near 3% complicates that outlook.
Financial markets are closely monitoring upcoming inflation reports for signs of either renewed progress or sustained price pressures. If inflation remains elevated, the Fed could maintain higher interest rates for longer than previously expected. Conversely, a renewed slowdown in price growth might reopen the door to rate reductions later in 2026.
For consumers and businesses alike, the December data reinforces a familiar theme: inflation is no longer surging as it did in 2022, but it has not fully retreated to comfortable levels either. As long as price increases outpace wage gains for some households, economic dissatisfaction may persist.
With steady consumer spending and moderate growth continuing into the new year, the path of inflation will likely determine the broader economic trajectory in 2026. Policymakers, investors, and households will all be watching closely as the Federal Reserve weighs its next move.
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