Introduction to Inflation
The fight against inflation has seen a stall in progress in December, with price pressures from groceries, dining out, utility gas, clothing, and other categories of consumer spending. The consumer price index, a key inflation gauge, rose 2.7% in December from 12 months earlier, which was unchanged from the previous month and in line with estimates.
Understanding the Consumer Price Index
The consumer price index is a measure of the average change in prices of a basket of goods and services consumed by households. The Federal Reserve, the U.S. central bank, targets an annual inflation rate that averages roughly 2% over the long term. However, tariffs levied by President Donald Trump have put upward pressure on the inflation rate. Tariffs are a tax on imports, paid by the U.S.-based importer, and economists have expected that businesses would pass along at least some of that tax to consumers via higher prices.
The Impact of Tariffs on Inflation
According to Mark Zandi, chief economist at Moody’s, tariffs have pushed up inflation by a little over half a percentage point. However, the pass-through to consumers has been more muted than expected, likely because businesses have chosen to erode their profit margins rather than risk alienating consumers via higher prices. Companies with inventory imported to the U.S. before tariffs were implemented were also able to sell those products to consumers at typical prices.
Inflation Expectations
Economists expect inflation to have peaked and to throttle back in the second half of 2026. "Short of any new tariffs coming online, we think the direction of inflation is lower," said Tom Porcelli, chief economist at Wells Fargo. The Supreme Court is poised to deliver a ruling in the coming days or weeks that could strike down a legal pathway the Trump administration has leveraged to impose universal tariffs on a broad swath of trading partners.
Good News for the Federal Reserve
Overall, the headline inflation rate is higher than it appears on paper, Zandi said. The record-long government shutdown prevented federal statisticians from collecting typical inflation data in October, which may have distorted the inflation rate. Moody’s estimates the annual CPI inflation rate would be around 3% if that data were included.
Consumer Staples and Affordability
Affordability has emerged as a key financial focus for consumers and a talking point for politicians. Inflation for certain household necessities increased in December. For example, food prices for groceries and at restaurants each increased 0.7% on a monthly basis, from November to December. Clothing prices were also up about 0.6% on a monthly basis. However, some increases may appear larger than in reality due to data distortions caused by the government shutdown.
Conclusion
In conclusion, the fight against inflation has seen a stall in progress in December, with price pressures from various categories of consumer spending. Tariffs have pushed up inflation, but the pass-through to consumers has been more muted than expected. Economists expect inflation to have peaked and to throttle back in the second half of 2026. The Federal Reserve is likely to remain on an extended pause, waiting to see the impact of their recent string of rate cuts. As the inflation rate continues to evolve, it is essential for consumers to stay informed and adapt to the changing economic landscape.
