A December Downshift: Inflation Loses Momentum

• EIA data showed gas prices dropped in December.

• NAR data shows house price growth keeps cooling.

• Fed survey data point to no change in prices received.

Inflation growth eased more in December…

When I worked on Wall Street, one of my favorite parts of the job was getting out and meeting with clients. I always enjoyed the conversations. It was interesting to hear and discuss the topics that were front and center with investors. That way, I could use that information to better help them when I was back in the office.

Another part of the process I enjoyed was visiting different parts of the country. As I traveled, I paid attention to the prices of goods and services relative to where I lived. I liked to gauge how much those costs would—or wouldn’t—change over the course of my trips.

Last week I was on the road visiting some customers. I drove up the eastern seaboard. Naturally, I had to fill my car with gas. One of the first things I noticed was how cheap prices were at the pump. For the first time in a while, I filled up with fuel that cost less than $3 per gallon. That hasn’t happened since the pandemic. I figured if I’m seeing it, others must be taking notice as well.

Right on cue, the Consumer Price Index (CPI) for December is set for release this week. According to the Federal Reserve Bank of Cleveland, annualized inflation is expected to drop to 2.6% for the month…

Based on the data I follow, inflation growth likely eased last month. While the annual pace may still sit above the Fed’s 2% target, it is unlikely to derail the central bank’s path toward easing rates more by the end of 2026. That should help support a steady, long-term rally in the S&P 500 Index.

But don’t take my word for it, let’s look at what the data’s telling us…

Gas Prices

One of the first places I look when gauging inflation is gasoline. It’s a line item that hits most of our wallets, as fuel in the tank lets us live our lives.

The chart below shows the Energy Information Administration’s (“EIA”) monthly gasoline price data, covering all grades. I use this broader measure because not everyone buys the same type of fuel. Looking at the full picture gives a better sense of how price changes affect everyone’s budget, not just one group.

Gas prices fell in December versus last year. The average cost per gallon was $3.02, compared to $3.14 a year ago, a 3.7% decrease…

Historically, gas prices rise in early spring, peak in April, and then gradually ease through the rest of the year. For most of 2025, prices have been under pressure compared to 12 months ago. But notice the pace of contraction had been slowing since August. However, in December prices saw a sharp drop on concerns of too much oil supply. They fell almost 5% on a month‑over‑month basis.

Why does that matter? Because gas prices tend to lead headline CPI. If costs are rising elsewhere due to tariffs, the lack of price increases should help keep a lid on overall price growth. Still, the benefit won’t be as strong as it was in spring and early summer.

Prices Received

This next chart is a gauge I built using monthly manufacturing and services index data from regional Fed banks. They ask businesses whether activity is rising, falling, or holding steady, and then publish indexes to measure the change.

I’ve combined data from Dallas, Kansas City, New York, and Philadelphia. Together, these regions account for about 32% of national economic output. For this chart, I focused on prices received, a proxy for CPI. The gauge was little changed in December after three straight monthly drops. The last time we saw a similar setup was in 2024, when annualized inflation growth dropped to 2.4%...

I weighted the mix to 65% services and 35% manufacturing to reflect CPI composition. The December reading came in at 18, compared to 17.6 in November. Neither manufacturing nor services experienced much change. So, I wouldn’t be surprised to see monthly CPI in the flat to up 0.1% range for December.

House Prices

As I’ve been saying, house price growth is slowing—and that matters. Shelter accounts for 35% of CPI. Owners’ equivalent rent makes up 26%, while rent of primary residence adds another 7.5%. So, housing plays a big role.

The latest data from the National Association of Realtors (“NAR”) shows continued easing in existing home price growth…

In December, the median existing home price was just over $409,000, a 1% year‑over‑year increase. That’s one of the weakest numbers we’ve seen in 2025 and well below the typical 7%+ gains seen in prior years. On a month‑over‑month basis, prices fell 1%.

Zooming out, the trend is clear. This marks the eighth straight month of sub‑3% annualized price growth. We haven’t seen that since early 2023, when the Fed first signaled it would slow rate hikes. That should also help keep a lid on runaway prices.

Bringing It All Together

The Fed’s dual mandate is clear: stable prices and maximum employment. In short, it uses monetary policy to keep inflation in check while encouraging hiring.

Throughout this year, employment data has shown a sharp deceleration. Based on data released earlier last week, that trend remains intact.

So yes, the annualized pace of inflation growth may still sit above the Fed’s 2% target. But the underlying components suggest inflation is headed lower. If we see the pace of annualized growth ease when the numbers are released later this week, it should signal to policymakers and investors that the recent rebound in prices may be over. If we start to see additional headway in early 2026, it should give policymakers room to ease rates more, later next year. That will support economic growth and a steady rally in the S&P 500.

Five Stories Moving the Market:

U.S. Treasury Secretary Scott Bessent will urge Group of Seven nations and others to step up their efforts to reduce reliance on critical minerals from China when he hosts a dozen top finance officials this week; the meeting will include finance ministers or cabinet ministers from the G7 advanced economies, the European Union, Australia, India, South Korea, and Mexico – Reuters. (Why you should care – a unified response will make the technology supply chain less dependent on China)

U.S. Treasury Secretary Scott Bessent said additional U.S. sanctions on Venezuela could be lifted as soon as this week to facilitate oil sales, and that he will also meet next week with the heads of the International Monetary Fund and World Bank on their re-engagement with Venezuela – Reuters. (Why you should care – freeing up roughly $5 billion in frozen assets would be a boost to Venezuela’s economy, potentially supporting infrastructure upgrades)

U.S. consumer sentiment rose in recent weeks on more upbeat views about the economy as tariff concerns fade; the University of Michigan’s consumer sentiment index hit a five-month high in January – Bloomberg. (Why you should care – a trough and rebound higher in University of Michigan consumer sentiment typically portends above-average stock market gains over the following couple of years)

U.S. President Donald Trump is directing Fannie Mae and Freddie Mac to purchase $200 billion in mortgage bonds; the housing-finance giants grew their retained portfolios — the portion of bonds and loans they hold onto rather than sell to investors — by more than 25% in the five months through October – Bloomberg. (Why you should care – such a move would help to drive down mortgage rates, boosting the outlook for home purchases)

U.S. President Donald Trump called for credit-card interest rates to be capped at 10% for one year in his latest attempt to address voter concern about the stubbornly high cost of living – WSJ. (Why you should care – while the rate cap would be domestically popular, it’s likely politically motived ahead of the midterm elections)

Economic Calendar:

Japanese Markets are Closed

Eurozone – Sentix Investor Confidence for January (4:30 a.m.)

ECB’s De Guindos (Vice President) Speaks (3:50 a.m.)

Treasury Auctions $86 Billion in 13-Week Bills (11:30 a.m.)

Treasury Auctions $77 Billion in 26-Week Bills (11:30 a.m.)

Treasury Auctions $58 Billion in 3-Year Notes (11:30 a.m.)

Treasury Auctions $39 Billion in 10-Year Notes (1 p.m.)

Fed’s Bostic (Atlanta, Non‑voter) Speaks (12:30 p.m.)

Fed’s Barkin (Richmond, Non‑voter) Speaks (12:45 p.m.)

Fed’s Williams (New York, Voter) Speaks (6 p.m.)