In 2025, the consumer price index (CPI) gradually cooled on paper, helped in part by falling gasoline prices, yet many households continued to feel strong pressure from high prices. Gasoline became cheaper, but electricity costs rose; rent growth slowed, but the burden of paying for groceries stayed heavy. Economists expect that prices in the twelve months through December increased by around 2.8%. That is much lower than the peaks seen in 2022–23, but still above the Federal Reserve’s 2% target.
From the perspective of consumer sentiment, many people still expect prices to keep rising into 2026. According to the New York Fed’s December 2025 survey, respondents estimate near-term inflation at 3.4% and increasingly feel it will be harder to pay down debt over the next three months. Behind this is what’s called a “K-shaped” economy: higher-income households benefit from rising asset prices and keep spending, while lower-income households struggle as wage growth fails to catch up with productivity gains. At the same time, an increase in the standard deduction and expanded tax credits are expected to boost 2026 tax refunds, which could provide some support to household finances.
The December CPI report is expected to offer a clearer read on inflation after the longest government shutdown in U.S. history disrupted data collection late last year. Economists at Wells Fargo say that many of the distortions seen in the previous release should be unwound in the December data. They expect goods prices to rebound after holiday discounting, and services prices to pick up again as well, particularly in seasonally sensitive categories like lodging away from home and airfares.
Trade uncertainty was another major factor shaping price movements over the year. Ahead of tariff implementations, consumers rushed to buy cars, electronics, and other durable goods, pushing up demand and prices when supply was tight. Going forward, three core areas to watch are housing, wages, and energy, because they make up large shares of the CPI and spill over into other prices. Across the U.S., housing inflation has been cooling, wage growth is lagging behind productivity, and gasoline prices remain relatively low. Taken together, these three elements point toward further disinflation into 2026.
On the policy side, the Federal Reserve is set to scrutinize the December CPI data ahead of its late-January meeting. The jobs report released on January 9 showed the unemployment rate falling from November to December, underlining the resilience of the labor market. As a result, markets see little chance of another rate cut in January, following three consecutive cuts late last year. Many forecasters expect policymakers to pause and assess how those earlier cuts are feeding through to the broader economy and inflation before making any further moves.
Q1. How much did inflation really cool in 2025?
A1. The CPI for the twelve months through December is expected to have risen by roughly 2.8%, a substantial comedown from the peaks in 2022–23. However, this still sits above the Fed’s 2% target, and many households continue to feel the pinch from essentials like utilities and food, where the sense of price relief has been limited.
Q2. What are the main factors that will shape inflation heading into 2026?
A2. Housing costs, wages, and energy prices are seen as the three core drivers. Housing inflation has been losing momentum nationwide, while wage growth is not fully keeping pace with productivity, and gasoline prices remain low. On top of that, trade tensions and the K-shaped nature of the recovery—where higher-income households pull ahead—shape price expectations and consumer behavior, which in turn can influence the inflation path.
Q3. How is this environment likely to influence the Fed’s rate-cut decisions?
A3. With inflation still slightly above target and unemployment remaining low, the Fed has less urgency to cut further. Having already delivered three cuts late last year, policymakers have strong incentives to pause in January and observe how those moves affect growth, the labor market, and inflation. The December CPI and upcoming data will be key inputs as they calibrate the timing and scale of any future policy changes.
