US Inflation Expected to Rise Amid Strong Holiday Spending Despite Consumer Caution

Inflation is projected to accelerate in early 2026 following a subdued November CPI report, driven by robust holiday retail activity that surpassed $1 trillion in total spending. Consumer resilience despite high interest rates underscores persistent demand pressures.

Inflation is poised to pick up in the first quarter of 2026 after November’s Consumer Price Index (CPI) showed only a 0.2% month-over-month increase, below expectations. The muted rise was attributed to temporary declines in energy and apparel prices, but underlying demand remains firm, particularly during the holiday season. Total holiday spending in 2025 reached $1.03 trillion, according to the National Retail Federation, marking a 4.7% year-over-year increase and setting a new all-time high. This surge reflects sustained consumer demand despite a Federal Reserve policy rate held at 5.5% since July 2024 and elevated borrowing costs. Retailers such as Nordstrom and Lululemon reported double-digit sales growth in November and December, with Lululemon’s online traffic rising 22% compared to the prior year. Nordstrom’s flagship stores in California and New York saw foot traffic exceed pre-pandemic levels by 18%, indicating strong in-person engagement. The rebound in service-sector inflation, particularly in housing and healthcare, is expected to offset temporary declines in goods prices. Core CPI, which excludes food and energy, rose 3.1% year-over-year in November, signaling persistent underlying inflationary pressures. Market participants now anticipate a 70% probability of a rate hold at the upcoming January FOMC meeting, with a 30% chance of a small hike if January data confirms a trend toward higher inflation. Treasury yields climbed, with the 10-year yield rising to 4.23%, reflecting renewed expectations of delayed rate cuts.