Inflation rose 2.7% the year ending in December, the Bureau of Labor Statistics reported Tuesday in an update to the consumer price index.
The report shows that inflation continued to trend down in 2025, President Donald Trump’s first year back in office, after exploding to the highest rates in decades in 2021 and 2022, dooming President Joe Biden’s reelection bid and cashing major hardship for many families.
But inflation has also proved resistant. It is still running above the Federal Reserve‘s 2% target. The accumulated inflation of the past few years has driven consumer sentiment to historic lows and damaged the Republican Party’s standing with voters.
The persistence of inflation has created a dilemma for the central bank. In most circumstances, it would not cut its interest rate target with inflation so high. But it also faces pressure to ease monetary policy because of signs that the labor market is weakening.
A major complicating factor is the imposition by Trump of major tariffs. Fed officials have worked all year to try to tease out whether the tariffs have driven up certain prices, and whether they might be masking an underlying cooling-off of price pressures.
Core inflation, a measure that strips out volatile food and energy prices, was 2.6% for the year ending in December.
In the month of December alone, prices rose 0.3%.
The latest CPI report is the last such inflation reports that the Fed will receive before it meets later this month to decide whether to cut interest rates again. Trump has been pushing the Fed to cut rates for months, and the Fed has done so at recent meetings. This time, though, investors expect Fed officials to hold rates steady.
While inflation is still above the Fed’s target, there are signs from the jobs numbers that the economy is cooling.
The economy added 50,000 jobs in December, and the unemployment rate fell to 4.4%, the Bureau of Labor Statistics said Friday. But with revisions to the numbers for October and November, the three-month moving average of job gains was -22,000 in December.
One silver lining, though, is that private-sector job growth has been better, averaging nearly 30,000 over the past three months.
Year-ahead inflation expectations are running at 4.2% this month, the lowest since January 2025, but still well above the Fed’s 2% inflation target, according to the University of Michigan Consumer Sentiment Index for January. Long-run inflation expectations increased a bit from 3.2% in December 2025 to 3.4% in January 2026.
GOP CHAIRMAN ISSUES DEFENSE OF POWELL IN BREAK WITH TRUMP
Ahead of the closely watched report, Fed Chairman Jerome Powell announced Sunday night in a video statement that the Justice Department was investigating him. Powell revealed the Fed recently received grand jury subpoenas related to testimony he gave to the Senate last year about renovation cost overruns of the Fed headquarters building in Washington, D.C.
Powell has denied wrongdoing and suggested that the investigation is directly tied to the president’s push for the Fed to keep cutting interest rates. The investigation is unprecedented in modern history.
