Inflation cooled slightly in December though it remains above Fed's target

WASHINGTON (AP) — Inflation cooled a bit last month as prices for gas and used cars fell, a sign that stubbornly elevated cost pressures are slowly easing.

Consumer prices rose 0.3% in December from the prior month, the Labor Department said Tuesday, the same as in November. Excluding the volatile food and energy categories, core prices rose 0.2%, also matching November's figure. Increases at that pace, over time, would bring inflation closer to the Federal Reserve's target of 2%.

Many economists had expected inflation to jump last month as the government resumed normal data collection after the six-week shutdown last fall, so the modest increases that matched the November figures came as a relief. The price of manufactured goods was flat in December, a sign that the impact of tariffs may be starting to fade.

“Distortions caused by the government shutdown have made the inflation data harder to interpret, but the recent run of figures suggests inflation has peaked,” Michael Pearce, chief U.S. economist at Oxford Economics, wrote in a note to clients.

Signs that inflation is cooling could make it more likely that the Federal Reserve will reduce its key interest rate later this year, which could translate into lower borrowing costs for mortgages, auto loans, and credit cards.

Even so, the large price increases in recent years for necessities such as groceries, rent, and utilities have left many American households feeling squeezed, turning “affordability” issues into high-profile political concerns. Food prices have jumped about 25% since the pandemic.

President Donald Trump, stung by last year's election results that suggested voters are souring on his handling of the economy, has responded with an array of initiatives intended to address rising costs, including a proposed ban on Wall Street firms buying homes, a 10% cap on credit card interest rates, and the suspension of many tariffs on imported goods, such as coffee, pasta, and furniture.

Still, grocery prices jumped 0.7% in December from the previous month, a sign food costs remain elevated. Compared with a year ago, food prices have risen 2.4%, Tuesday's figures showed, a bigger increase than in 2024 or 2023.

Trump celebrated Tuesday's figures on social media: “Great (LOW!) Inflation numbers for the USA,” he posted. He also celebrated estimates that the economy expanded at a solid pace in last year's fourth quarter: “Thank you MISTER TARIFF!”

Yet in a speech Monday, John Williams, president of the Federal Reserve Bank of New York and a key member of the Fed's rate-setting committee, said that tariffs have likely increased inflation by about a half-percentage point.

“Tariffs aside, underlying inflation trends have been pretty favorable, and we’re seeing no signs of broader inflationary pressures,” Williams said. He expects inflation will peak in the first half of this year, before declining toward 2% by 2027.

Tuesday's report is the first clear measure of inflation since September. The six-week government shutdown last fall suspended the collection of price data used to compile the inflation rate, and the government didn't issue a report in October and November's figures were partially distorted by the impact of the closure.

Most prices in November were collected in the second half of the month, after the government reopened, when holiday discounts kicked in, which may have biased November inflation lower. And since rental prices weren’t fully collected in October, the agency that prepares the inflation reports used placeholder estimates in November, that may have biased prices lower, economists said.