The December Stall: A Structural Inflection Point in the Inflation Narrative?

The December inflation report arrived with a whisper, not a bang. The official Consumer Price Index rose a modest 0.3% in December, holding the year-over-year rate at 2.7%, unchanged from November. This apparent pause is the central puzzle. Is it a genuine softening in price pressures, or a statistical mirage created by a broken data collection system?

The evidence points to the latter. Both the official CPI and a closely watched alternative, the AIER Everyday Price Index, were compromised by a temporary government funding lapse that interrupted standard federal price collection. This disruption created significant uncertainty, particularly for shelter costs, which account for more than a third of the CPI basket. The administration's own analysis notes that the CPI survey was disrupted by the government shutdown, with the October survey lost entirely and the November survey compressed into its final weeks. That compressed period, dominated by Black Friday promotions, likely further suppressed the measured inflation rate.

The data from the alternative index underscores the fragility of the official reading. The AIER Everyday Price Index, which tracks a broader set of prices, rose a scant 0.04 percent in December, essentially flat for the month. Its annual inflation rate came in at 3.02%, a figure that, while higher than the official CPI's 2.7%, still suggests a pronounced deceleration. The index's composition shows a mixed bag: rising food categories offset declines in fuel, but the overall move was negligible. This disconnect between the official and alternative measures, both derived from compromised data, makes it impossible to discern the true trend.

The bottom line is one of methodological noise. The year-over-year measures were hardest hit by the disruptions, and the problem will linger until the methodology for shelter costs is updated in April. In this environment, the headline 0.3% monthly gain and the 2.7% annual rate must be treated as provisional, not definitive. The central question for policymakers and markets is whether the apparent stall is a real structural shift in inflation dynamics or simply a data artifact. For now, the evidence suggests the latter.

The Uneven Inflation Landscape: Services and Food as Persistent Pressures

While the headline CPI stalled, the underlying data reveals a landscape of stark contrasts. Inflation is not cooling uniformly; it is shifting. The most persistent pressures are now concentrated in food and services, sectors where labor costs and supply chains remain tight.

Food prices accelerated, with the annual rate hitting 2.4% in December. This was driven by strong monthly gains in both groceries and dining out, each rising 0.7% for the month. The administration's recent tariff cuts on food have yet to translate into lower consumer prices, highlighting the lag between policy and market impact. The resilience here is a direct function of ongoing supply constraints and elevated input costs.

Services inflation, however, is the more structural concern. Shelter costs, which account for over a third of the CPI basket, rebounded in December. More broadly, the leisure and hospitality sector is a standout, with gains reflecting a persistent loss of immigrant labor. That labor shortage is beginning to show up in monthly inflation data, as businesses pass on higher wage pressures to consumers. This dynamic is not isolated to hospitality; the care economy also shows buoyancy, with in-home elder care prices up 10.7% from a year ago, another sector vulnerable to worker shortages.

The picture is not entirely one of upward pressure. There is selective relief. Fuel prices declined, and categories like nonprescription drugs and movie admissions saw price drops. This divergence underscores that the disinflation story is not dead, but it is being driven by specific, often cyclical, factors rather than broad-based easing.

The bottom line is one of uneven deceleration. The official CPI's 0.3% monthly gain masks a reality where core services, particularly those tied to labor, remain sticky. For the Federal Reserve, this creates a policy dilemma: the headline numbers may be noisy, but the underlying pressures in food and services suggest inflation is not yet on a clear, sustainable path back to target. The path forward will be determined by whether these service sector costs can be tamed as labor markets finally ease.

Policy Implications and Forward Scenarios

The stalled data and uneven pressures create a complex setup for the Federal Reserve. The central bank's policy stance will be dictated by its preferred gauge, the PCE price index, which tends to run below the headline CPI. While the official CPI is compromised, the PCE is also subject to lags and revisions, meaning the Fed will have to navigate a period of heightened uncertainty. The key will be whether the underlying service and food pressures, which are more persistent, can be tamed as labor markets finally ease.

The primary upside risk to the inflation outlook is a combination of tariffs and sticky service costs. Economists note that tariffs have pushed up inflation by a little over half a percentage point, and without them, inflation might already be at target. More broadly, the persistent loss of immigrant labor is beginning to show up in monthly inflation data for sectors like leisure and hospitality, a dynamic that could sustain service inflation above the Fed's 2% target. This creates a clear policy dilemma: the headline numbers may be noisy, but the underlying pressures in food and services suggest inflation is not yet on a clear, sustainable path back to target.

On the flip side, a housing downturn remains a potential downside counterweight. The recent rebound in shelter costs is a notable feature of the December report, but a sustained slowdown in the housing market could eventually provide a meaningful drag on overall inflation. For now, however, the service sector's resilience appears to be outweighing any housing softness.

The primary catalyst to watch in the coming months is the April methodology update for shelter costs. The administration's own analysis notes that the year-over-year measures were hardest hit by the disruptions caused by the government shutdown, and the problem will linger until this update. A change in how shelter is measured could materially alter the CPI's trajectory in 2026, either by introducing a new upward bias or by better reflecting true market conditions. Until then, the Fed will likely remain in a wait-and-see posture, using the PCE as its guide while acknowledging the data's fragility.

The bottom line is one of cautious navigation. The Fed is unlikely to rush to cut rates while inflation remains uncomfortably high, as noted by economists. Yet, with the data compromised and the path forward uncertain, the central bank will be watching for clear, sustained evidence of disinflation across the board. The coming months will be defined by the interplay between these persistent pressures and the structural shift in data collection, with the April shelter update serving as a potential inflection point.