US Inflation Report & BLS CPI Forecast - December 2025

Executive Summary

The U.S. economy entered late 2025 with signs of robust growth, as Q3 GDP expanded at a strong 4.3% annualized pace. However, growth is expected to moderate in early 2026 amid a tightening labor market, slowing wage growth, and disruptions related to the recent government shutdown.

Consumer spending remains a key driver of economic activity, largely supported by higher-income households. However, personal income growth has flattened and the personal saving rate has declined, suggesting a potential slowdown in consumption in Q4 and into 2026. Provisions in the administration's Big Beautiful Bill, including higher deductions, tax relief on tips and overtime income, auto loan interest deductions, and higher caps on state and local tax deductions, could provide incremental support to spending. For this support to become more broad-based, however, wage growth would likely need to accelerate, which could in turn pose upside risks to inflation. Overall, current trends point toward a moderation in consumer spending in 2026.

Exhibit 1 – Personal Savings Rate (%) vs Average Hourly Earnings

Source: Bureau Economic Analysis & Bureau of Labor Statistics

Recent labor data indicate that December job gains largely offset November losses. ADP data suggest that evolving labor market dynamics are reducing demand for new hires rather than leading to outright workforce reductions. Employment gains were concentrated in healthcare, education, leisure and hospitality, while professional and business services, and manufacturing continued to shed jobs. Hiring among firms with fewer than 50 employees, representing roughly 40% of total employment, resumed for the first time since July. Continued stabilization in small-business hiring would help support overall labor market conditions, as these firms have been most affected by rising costs and economic uncertainty.

Inflation has been lifted by the gradual pass-through of tariffs, though uncertainty remains over whether the impact represents a one-time adjustment or a more prolonged process as firms raise prices at different stages. To date, tariffs are estimated to have added approximately 0.7 percentage points to inflation. Concerns about tariff-driven inflation have eased, with Federal Reserve Chair Jerome Powell indicating limited near term risk. Tariff-related inflation is expected to peak in early 2026, with the incremental impact likely limited to a few tenths of a percentage point or less, suggesting tariffs will play a minimal role in consumer price inflation in 2026.

Following the initial shock of the April 2025 reciprocal tariffs, rates were capped at 10% across the board. This remained in place until August, when reciprocal tariffs for most major economies were set notably above 10%. In early October, President Trump threatened triple-digit tariffs on all Chinese imports, but tensions eased after the Trump–Xi meeting later that month. The outcome was a reduction in tariffs on Chinese goods to roughly 30%–45%, depending on the product, compared with the 40%–55% rates that had been in place beforehand. This easing is likely contributing to the goods deflation observed this month.

Due to the government shutdown, there have been no reported figures for import excise and duties revenue since September. However, according to a research note from Pantheon Macroeconomics, U.S. government revenue from the administration’s tariffs is declining. This suggests that the inflationary impact of tariffs is likely to diminish over time. Pantheon’s data show that tariff revenues peaked at $34.2 billion in October, before falling to $32.9 billion in November and $30.2 billion in December.

Exhibit 2 – Patheon Macroeconomics Tariff Revenue

Source: Pantheon Macroeconomics

With economic activity remaining resilient, unemployment low by historical standards, and inflation easing but still above target, policy rates appear to be near estimates of neutral, neither stimulating nor restraining growth. Market expectations currently anticipate two to three rate cuts in 2026, with the CME FedWatch indicating a 96% probability that rates will remain unchanged at the next meeting in January. A key challenge for the Federal Reserve in 2026 will be navigating the deepening economic and policy divisions that emerged in the second half of 2025.

Labor Market not deteriorating as previously expected

December employment growth remained positive but came in weaker than expected, reflecting job losses across the construction, retail, and manufacturing sectors. However, the decline in the unemployment rate to 4.4% suggests the labor market is not deteriorating rapidly as previously believed.

According to the Labor Department’s Bureau of Labor Statistics (BLS), nonfarm payrolls increased by 50,000 jobs last month. Truflation, however, reported a lower gain of just 20,000 jobs. This subdued pace of job creation cannot be overlooked, as hiring remains stuck at historically low levels, offering little reassurance about labor market momentum.

Job growth was driven primarily by restaurants and bars, followed by healthcare and social assistance. In contrast, retail payrolls declined amid weak holiday-season hiring, while manufacturing, construction, mining, transportation, and wholesale trade also saw reductions. In recent months, employment growth has additionally been affected by a significant reduction in federal government employees, many of whom accepted deferred buyout programs.

Looking at the full year, Truflation estimates that only about 425,000 jobs were added in 2025, averaging roughly 35,400 positions per month. This is less than one-third of the approximately 1.2 million jobs created in 2024, when monthly gains averaged around 100,000.

Exhibit 3 – Truflation Monthly Change in the U.S. Job Market, 2025 vs. 2024

Overall, the labor market appears stuck in a “low-hire, low-fire” equilibrium. Throughout the year, policy headwinds weighed on business sentiment, prompting many firms to remain cautious and prioritize cost control and workforce flexibility amid an uncertain operating environment.

Truflation employment data show that the total nonfarm payroll labor market declined by roughly 500,000 individuals over the course of 2025, falling to 143.1 million in December. Compounding this trend, 2025 marked the first decline in the U.S. immigrant population since the 1960s, following more than five decades of rapid growth. In January 2025, approximately 53.3 million immigrants lived in the United States; by June, the foreign-born population had fallen by more than one million to 51.9 million, as departures exceeded arrivals. Immigrants accounted for 19% of the U.S. labor force, down from 20% at the start of the year, a decline of more than 750,000 workers.

Exhibit 4 – Truflation Nonfarm Payroll & Unemployment Rate (%)

Source: Truflation & Bureau of Labor Statistics

Businesses have also held back on hiring as they reassess staffing needs while investing heavily in artificial intelligence. The economy has experienced a “jobless expansion,” with economic growth and worker productivity surging in the third quarter, partly attributed to AI-driven efficiency gains.  Truflation views these labor force shifts as structural rather than cyclical, which would limit the effectiveness of interest rate cuts in stimulating job growth. At the same time, reduced labor supply has likely helped prevent a sharper rise in the unemployment rate.

Despite employers’ reluctance to hire, wage growth has remained firm. Average wages rose 3.8% year over year in December, according to the BLS, following a 3.6% increase in November. The wage growth points to ongoing worker shortages in certain industries and could contribute to inflationary pressures in 2026.

Inflation Update – Some tariff relief

Due to the government shutdown, the Bureau of Labor Statistics (BLS) did not publish October CPI data. As a result, November was the first available data point, leaving no official month-on-month comparison between October and November. Instead, a rough estimate of monthly changes for November was constructed by comparing underlying price index levels with those from September.

There are ongoing concerns surrounding the December BLS CPI release. The government shutdown is likely to have introduced significant distortions, particularly through heavy reliance on imputation (carried-forward data) and a truncated sample during the holiday sales period. These factors may have artificially suppressed shelter and goods prices, resulting in an unreliable snapshot of underlying inflation. While the December report will restore standard month-on-month comparisons, questions around the consistency and stability of the November data mean these comparisons should be interpreted with caution.

With Truflation using uninterrupted real-time pricing information to provide the alternative measure of price movements, Truflation projects the BLS CPI to come in at 2.6% year-on-year for December, and broadly in line with market consensus at 2.7%, but the range is significant, from 2.5% to 3.1%.  This is likely driven by the distortions that linger from the November data.

The Truflation forecast reflects the continued changes in the consumer spending patterns and the changes in the China tariffs rate, following the Trump-Xi meeting and rates coming down from the 40%-55% range to 30%-45% range depending on goods categories. Truflation Goods inflation has been trending lower as households adjust to the higher prices, supported by improved supply dynamics, the roll-back of tariffs, and increased promotional activity to continue to drive sales.

The manufacturing sector contracted for the tenth straight month, with the ISM Manufacturing PMI slipping to 47.9 in December. Beyond the sectors lifted by an Artificial intelligence investment boom, the import duties have undercut manufacturing. 

Exhibit 5 – Truflation Year on Year Key Inflationary Metrics: Goods vs. Services vs. Core

By contrast, services inflation remains relatively elevated. Strong consumer demand has shifted from goods toward services, while higher wages, lingering supply constraints, and increased input costs have made services prices stickier and slower to decelerate. Key drivers include robust demand for experiences such as dining, travel, and entertainment; rising labor costs amid worker shortages and AI-related disruptions; and the pass-through of higher goods prices into service costs.

Analyzing the impact of wages on services prices suggests a varied and generally modest effect at the aggregate level, though it is more pronounced in certain sectors, including leisure and hospitality, education, and health services. The relationship is complex and typically involves a delayed pass-through of costs. Exhibit 6 highlights the comparison of the truflation services price increase vs wage increases and the statistical analysis shows that a one percentage point increase in labor costs results in only about a 0.15 percentage point increase in non-housing services prices over a four-year horizon, implying a relatively small annual effect at the aggregate level.

Exhibit 6 – Year-on-Year Comparison of Truflation Services Prices vs. Wage Increases

Source: Truflation & Bureau of Labor Statistics

There are notable sector-specific differences, confirming that wage growth does not translate uniformly into services inflation:

• Leisure & Hospitality: Wage increases are often passed through to prices almost immediately.

• Education & Health Services: The impact of higher wages on prices is delayed, typically taking around a year to materialize.

• Financial & Business Services / Trade & Transportation: The data do not show a statistically significant or consistent relationship between wage growth and price inflation due to the significant other costs in the business.

While wage growth is often passed on to consumers as a means of preserving profitability, labor is only one component of total costs. Firms may instead absorb higher wages through narrower margins or offset them via productivity gains. As a result, although wages do contribute to services inflation, particularly in labor-intensive industries, they are neither the sole nor the dominant driver and their impact varies significantly across sectors.

Turning to economic activity in the services sector, momentum strengthened in December, with the ISM Services PMI rising to 54.4. As services account for roughly two-thirds of U.S. economic activity, this points to solid underlying strength heading into the new year. Growth had been expected to slow in the fourth quarter, partly due to the 43-day government shutdown; however, the latest Atlanta Federal Reserve GDPNow estimates indicate a strong Q4 GDP outcome. The resilience in services activity was driven primarily by an increase in new orders, providing key support to fourth-quarter growth. While prices paid by service firms for inputs continued to ease, they remain elevated, suggesting inflation may stay above the Federal Reserve’s 2% target for some time.

Exhibit 7 – Truflation Year on Year Category Inflation Drivers

In December, the largest upward contributors to inflation were food, household operations, and housing, while apparel, utilities, and transportation exerted the largest downward pressures. This composition reflects evolving consumer behavior alongside persistent supply-side influences, including tariffs and energy demand.

Sector-Specific Inflation Drivers

• Food: +0.3% MoM I +2.0% YoY. Food prices rose in December as seasonal holiday demand collided with persistent and category-specific supply constraints. Short-term demand spikes for staples like beef and baking ingredients exposed rigid supply conditions, particularly in markets already under stress. Beef prices remained elevated due to a historically small cattle herd. Weather-related disruptions in major producing regions constrained global supplies of coffee and cocoa and raised production costs for key U.S. vegetables. These pressures were reinforced by higher labor, transportation, and energy costs, which continue to pass through the food supply chain. Together, these factors suggest December’s food inflation was driven less by broad macro conditions and more by seasonal and climate-related supply shocks that are likely to keep food prices volatile.

• Household Durables & Daily Use Items: +1.2% MoM I +5.24% YoY – Prices for household goods and services increased in December, largely reflecting the lingering effects of tariffs, which continue to raise import costs for items such as toys, electronics, and home décor. These higher costs, combined with residual supply-chain frictions and elevated input and transportation expenses, were passed through to consumers. As a result, businesses raised prices across a wide range of everyday and seasonal items e.g., Christmas trees, intensifying pressure on household budgets despite easing inflation elsewhere in the economy.

• Housing: +0.1% MoM I +0.5% YoY – Housing prices rose in December as tight inventory continued to constrain supply. Many homeowners, particularly those locked into ultra-low, pandemic-era mortgage rates, remain reluctant to sell. At the same time, motivated buyers stayed active, seeking year-end opportunities and potential tax advantages. Falling mortgage rates marginally improved affordability, drawing additional buyers into the market and intensifying competition for a limited pool of well-priced homes. Although housing demand typically softens during the winter, these forces outweighed seasonal patterns, pushing prices higher. Rent prices also continued to rise as demand for rental housing outpaced available supply and landlords passed through higher operating costs. Importantly, rents tend to be slow-moving and “sticky” on the way down. Even as broader inflation cools, landlords are still catching up on prior cost increases, keeping rent growth elevated. In short, rising rents reflect structural supply shortages and sustained cost pass-through rather than a temporary surge in demand.

• Transportation: -0.6% MoM I +1.5% YoY – Transportation costs declined in December, led by lower gasoline and vehicle prices. Gas prices fell due to a combination of seasonal and structural factors, including reduced demand following the end of peak summer travel, increased refinery output after seasonal maintenance, and softer crude oil prices amid ample global supply. Strong domestic production and weaker demand further weighed on prices, making December a seasonally favorable period at the pump. Vehicle prices also declined as dealers sought to meet year-end sales targets, clear aging inventory, particularly older model years, ahead of new arrivals, and stimulate demand through incentives during a typically slower holiday period. Discounts were especially evident for EVs and used vehicles, creating favorable conditions for buyers.

• Utilities: -0.1% MoM I +5.9% YoY – Utility prices eased, primarily driven by lower energy and gas costs. Improved supply conditions, including near-record U.S. oil production and steady output from non-OPEC producers, reduces pressure on global energy markets. At the same time, demand growth moderated amid slower global economic activity, improved fuel efficiency, and seasonal declines in driving after peak travel periods. Softer crude oil prices flowed through to lower gasoline and utility costs, while fewer refinery outages, normalized supply chains, and lower transportation costs helped stabilize inventories and reduce wholesale prices.

• Clothing: -1.9% MoM I +2.0% YoY – Apparel prices declined in December as retailers aggressively cleared seasonal inventory to make room for spring collections. Post-holiday promotions, including after-Christmas sales, combined with heightened consumer price sensitivity amid economic uncertainty, led to deeper discounting. These strategies helped retailers manage inventory, boost sales volumes, and attract value-conscious shoppers ahead of the new year.

Inflation Outlook: Short to Medium Term

Short-term inflation will remain elevated above the Fed's 2% target but should gradually moderate, driven by factors such as lingering supply chain issues, potential impacts from new tariffs, and robust consumer demand, with expectations hovering around 2.6%-2.8% for the near term before trending down towards. Key factors influencing the outlook are:

• Tariffs: Expected to pass costs on to consumers, pushing inflation upwards.

• Demand & Supply: While supply chains ease, constrained labor supply and strong demand keep upward pressure on prices.

• Wages: Continued wage inflation will spur further inflation

• Government Policy: The Big Beautiful Bill's impact on tax relief could spur inflation. 

Short-term inflation is expected to remain above the Federal Reserve’s 2% target but should gradually moderate over time. Near-term inflation is projected to hover in the 2.6%–2.8% range before trending lower, reflecting a combination of lingering supply-chain frictions, the potential inflationary impact of new tariffs, and resilient consumer demand. 

Key factors shaping the inflation outlook include:

• Tariffs: Higher import costs are likely to be passed on to consumers, exerting upward pressure on prices. The Supreme Court decision on the 14th of January will have a decisive impact.

• Demand & Supply Dynamics: While supply chains continue to normalize, constrained labor supply and strong consumer demand are keeping inflationary pressures elevated.

• Wages: Ongoing wage growth, particularly in labor-intensive sectors, is expected to contribute to persistent services inflation.

• Government Policies: The inflationary implications of fiscal policy, including the Big Beautiful Bill and associated tax relief, could add further upward pressure on prices.

The New York Fed’s December Survey of Consumer Expectations indicates that households are slightly more optimistic about 2026. Perceptions of current financial conditions and year-ahead expectations both improved, with a smaller share of Americans anticipating a deterioration in their financial situation. The Survey of Consumer Expectations also shows households anticipating inflation at 3.4% a year from now, marginally increasing from November, while the University of Michigan expected inflation rate in one year from now continues to decline now at 4.2%, signalling an improved outlook.

Exhibit 8 – Consumer Inflation Expectations (2% is the Fed Target)

Source: Federal Reserve Bank of New York & University of Michigan

However, pockets of stress remain. Delinquency expectations deteriorated, reaching their highest levels since the onset of the pandemic. The perceived probability of missing a minimum debt payment in the coming months rose to 15.3%, the highest level since April 2020. The increase was most pronounced among individuals over age 60, those without a college degree, and households earning less than $50,000 annually. Job-loss expectations also worsened across all age and education groups. Consistent with these trends, Moody’s reports that delinquency rates have risen and may continue to increase as higher joblessness places additional strain on household budgets.

At the same time, consumers are drawing on additional liquidity despite growing concerns about financial stress. Credit card balances continue to rise, according to recent reports from TransUnion and VantageScore. In an increasingly bifurcated, or “K-shaped,” consumer economy, rising credit card debt is widening the divide. Of the roughly 175 million U.S. credit card holders, about 60% carry revolving balances. While some households, often those benefiting from equity market gains, have strengthened their financial positions, others are struggling to keep up with higher borrowing costs and everyday expenses.

Conclusion: Inflation to remain volatile

Upside risks to inflation remain, with the Federal Reserve Board cautioning that inflation could prove more persistent than currently anticipated. In sum, inflation is likely to remain volatile and above the Fed’s 2% target in the near term, shaped by policy decisions, labor market dynamics, and household financial stress. While forecasts suggest inflation should eventually ease, the path lower is expected to be uneven.

APPENDIX A

Truflation Category Percentage Change Data

Month-over-Month and Year-over-Year

All Data is based on December 2025

US Inflation Report & BLS CPI Forecast - December 2025

TF 2025 - Inflation Report - US - M12 - Presentation.pptx.pdf

2 MB

About Truflation

Truflation provides a set of independent inflation indexes drawing on 70+ data partners/sources and more than 35 million product prices. These indexes are released daily, making it one of the most up-to-date and comprehensive inflation measurement tools in the world. Truflation has been leveraging this measurement tool to predict the BLS CPI number, with a 99.94% accuracy in predicting inflation in the last 12 months.