• CPI minus food, energy rose 0.2%, less than median forecast
• Hotel stays, tame rent increases help restrain price pressures

US consumer prices rose in December by less than forecast after months of faster underlying inflation persuaded the Federal Reserve to signal a pause in interest-rate cuts.

The so-called core consumer price index — which excludes food and energy costs — increased 0.2% after rising 0.3% four straight months, Bureau of Labor Statistics figures showed Wednesday. Cheaper hotel stays, a smaller advance in medical care services and relatively tame rent increases helped restrain the December figure.

While the easing in the CPI is welcome, Fed officials would need to see a series of subdued readings after months of elevated prints to reassure them that inflation progress has resumed. Lingering price pressures have contributed to a deep selloff in global bond markets and fueled concerns that the Fed eased policy too quickly at the end of last year.

Combined with last week’s strong jobs report, policymakers are widely expected to leave rates unchanged at their meeting later this month, and traders generally don’t see another cut until later this year.

“There’s still more inflation-fighting work for the Fed to do, which is why it has shifted plans to more slowly reduce the still-restrictive federal funds rate,” Sal Guatieri, senior economist at BMO Capital Markets, said in a note. “It will stand pat later this month, and may not resume cutting rates until it gets some clarity on the inflation pass-through of the tariffs that could begin rolling out next week.”

Treasury yields slid and S&P 500 index futures rose while the dollar declined after the CPI data.

Read More: Treasuries Surge as Easing Inflation Boosts Fed Rate-Cut Bets

Metric Actual Estimate
CPI MoM +0.4% +0.4%
Core CPI MoM +0.2% +0.3%
CPI YoY +2.9% +2.9%
Core CPI YoY +3.2% +3.3%

Economists see the core gauge as a better indicator of the underlying inflation trend than the overall CPI that includes often-volatile food and energy costs. The headline measure rose 0.4% from the prior month, with over 40% of the advance due to energy.

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This is the last inflation report of President Joe Biden’s tenure, an administration dogged by high prices coming out of the pandemic that surged a cumulative 20% while he was in office. Donald Trump will be sworn in next week, and economists generally anticipate his policies — particularly on tariffs — will put upward pressure on inflation, and measures of consumers’ expectations have been rising recently as well.

The advance in the CPI was also led by food prices, airfares, new and used cars, auto insurance and medical care. Goods costs excluding food and energy rose a smaller 0.1% after a 0.3% November increase. Also taking out used cars, goods prices fell.

Shelter prices, the largest category within services, climbed 0.3% in December for a second month. Owners’ equivalent rent as well as rent of primary residence — subsets of shelter — both ticked up following the smallest gains since 2021.

Excluding housing and energy, service prices rose 0.2%, the smallest increase since July, according to Bloomberg calculations. While central bankers have stressed the importance of looking at such a metric when assessing the overall inflation trajectory, they compute it based on a separate index.

That measure — known as the personal consumption expenditures price index — doesn’t put as much weight on shelter as the CPI, which is one reason why it’s trending closer to the Fed’s 2% target. Several categories that feed through to the PCE from the producer price index, a measure of wholesale inflation that was released Tuesday, were mostly tame. However, the PPI’s gauge of airfares picked up notably.

Policymakers also pay close attention to wage growth, as it can help inform expectations for consumer spending — the main engine of the economy. A separate report Wednesday that combines the inflation figures with recent wage data showed real hourly earnings grew 1% from a year ago, the smallest annual advance since July.

While data on retail sales, inflation expectations and the housing market will be released in the next two weeks, this is the last major economic report Fed officials will see before their Jan. 28-29 meeting.

Recent speeches and forecasts have indicated policymakers are still wary of upside risks to inflation and that they prefer a cautious approach to adjusting rates.