December's CPI report showed a year-over-year inflation rate of 2.1%, the lowest in over three years, sparking skepticism among economists and market participants. The sharp decline, particularly in housing and services, has prompted questions about data accuracy and underlying economic momentum.
- CPI year-over-year inflation fell to 2.1% in December 2025, down from 3.0% in November.
- Shelter costs declined by 4.8%, the largest monthly drop since 1985.
- Core inflation (ex-food, energy) dropped to 2.4%, the lowest since late 2021.
- S&P 500 rose 1.9% and 10-year Treasury yields fell to 3.85% on the news.
- Markets now price in two 25-basis-point rate cuts by August 2026.
- Analysts express concern over data methodology and lack of support from wage and business pricing indicators.
The latest US Consumer Price Index report, released on December 18, 2025, revealed a year-over-year inflation rate of 2.1%, a significant drop from November’s 3.0% and well below the Federal Reserve’s 2.5% target. This marked the first time inflation had fallen below 2.5% since early 2022, raising concerns about whether the data reflects genuine economic cooling or potential statistical anomalies. The decline was driven primarily by a 4.8% drop in shelter costs, the largest monthly decrease since 1985, and a 3.2% fall in services inflation, including healthcare and education prices. Meanwhile, core inflation—excluding food and energy—fell to 2.4%, the lowest level since late 2021. These figures represent a stark reversal from the persistent price pressures seen through much of 2023 and 2024. Financial markets reacted swiftly: the S&P 500 surged 1.9% in early trading, and Treasury yields dropped, with the 10-year note falling to 3.85%. Investors now anticipate a series of rate cuts starting in Q2 2026, with futures pricing in two 25-basis-point reductions by August. However, analysts caution that the report may understate underlying inflationary pressures, particularly in wage growth and input costs. The Bureau of Labor Statistics’ methodology, including the use of chain-weighted indexes and sampling adjustments, has come under renewed scrutiny. Some economists question whether the timing of survey data collection and the shift toward digital pricing in retail may have contributed to the sharp decline. The lack of corroborating evidence from alternative indicators—such as wage growth and business pricing surveys—further fuels skepticism about the report’s reliability.