CPI Report Shows Inflation Stuck at 2.7% as Americans End 2025 Feeling Squeezed

The American economic landscape remains under significant pressure as the US Bureau of Labour Statistics (BLS) reported that the annual inflation rate held steady at 2.7% in December 2025.

Released on 13 January 2026, the final Consumer Price Index (CPI) report of the year highlights a persistent 'affordability crisis', with cooling energy prices failing to offset sharp accelerations in the cost of groceries and housing.

The report arrives as the Trump administration's tariff policies—introduced throughout the second half of 2025—begin to filter through to consumer goods. Economists note that while headline inflation has fallen from its 2022 peaks, the cumulative weight of high prices has left consumer sentiment at a historic low.

The report highlights the economic reality facing American consumers, who are navigating a market influenced by the Federal Reserve's interest rate policies and the Trump administration's ongoing tariff implementations, which economists note have disproportionately affected goods prices throughout the second half of 2025.

The CPI, a vital metric tracking the cost of a representative basket of goods and services, increased by 0.3 per cent on a seasonally adjusted basis. This brought the annual inflation rate to 2.7 per cent, matching the figure recorded in November.

The data published on Tuesday provides the final retrospective look at the inflationary trends of 2025, a year that saw significant data disruptions due to a 43-day government shutdown in the fall.

The impact is being felt across the United States, with specific pressure points noted in metropolitan housing markets and retail grocery chains nationwide, particularly in the 'food away from home' sector, which saw its sharpest monthly acceleration since 2022.

While the 'headline' figure remained stable, the internal data suggests a more volatile picture for the average household.

Core inflation, which strips out the more erratic prices of food and energy, rose by 2.6 per cent over the last 12 months, matching the annual core rate from November.

Economists had hoped for a more significant cooling effect toward year-end, but the persistence of high costs in essential sectors has kept the rate well above the Federal Reserve's preferred 2 per cent target.

The Grocery Basket and Housing Strain

The primary drivers of the December squeeze were food and shelter, which continue to devour a disproportionate share of disposable income. Food prices saw a sharp monthly acceleration of 0.7 per cent, with the annual increase for 'food at home' reaching 2.4 per cent.

Specific staples saw eye-watering surges; while egg prices fell 8.2 per cent in December, the broader meats, poultry, fish, and eggs index is up 3.9 per cent compared to 2024, while the cost of nonalcoholic beverages ballooned by 5.1 per cent.

Shelter costs, the largest component of the CPI, rose by 0.4 per cent in December alone. With an annual increase of 3.2 per cent, rent and 'owners' equivalent rent' (which both rose 0.3 per cent in December) have become the most stubborn hurdles for the central bank.

Despite a slight cooling in used vehicle prices, which fell by 1.1 per cent (down 1.6% annually), these savings were largely negated by rising airline fares, which soared 5.2 per cent in December, and medical care services, specifically hospital services, which increased 1.0 per cent over the month.

Tariff Pressure and the Federal Reserve Dilemma

A complicating factor for the 2026 economic outlook is the impact of trade policy. Throughout 2025, the phased introduction of tariffs on imported goods began to filter through to the consumer level, particularly following the 'liberation day' tariff announcement in April.

While some businesses initially absorbed these costs using 'pre-tariff' inventory, the December report indicates that these cushions are thinning.

Notably, prices for recreation rose 1.2 per cent month over month, the largest one-month increase ever reported for that index. This leaves the Federal Reserve in a precarious position.

Traditionally, the central bank would maintain higher interest rates to combat inflation at 2.7 per cent. However, with the unemployment rate slipping to 4.4 per cent in December from 4.5 per cent in November and job growth slowing to a modest 50,000, there is mounting pressure to cut rates to stimulate the economy.

The latest CPI data likely solidifies a 'wait and see' approach for the Fed's next meeting on January 28, as officials weigh the risk of a recession against the goal of price stability in what Chair Jerome Powell has described as 'driving in the fog' due to recent data disruptions.

Consumer Sentiment and 2026 Outlook

For many Americans, the technical 'cooling' of inflation from its 2022 peak offers little comfort. The cumulative effect of years of high prices has left consumer sentiment at historic lows.

A recent Bankrate Financial Outlook Survey indicated that roughly one-third of Americans expect their personal finances to worsen in 2026, the highest level of pessimism recorded since 2018.

As the US enters a new fiscal year, the 'affordability crisis' remains the dominant narrative. With electricity costs up 6.7 per cent and natural gas prices surging 10.8 per cent over the last 12 months, the squeeze on the American middle class shows no immediate sign of relenting.

The December CPI report confirms that while the inflationary fire has been contained, the embers continue to burn through household savings at a time when the economy has added just 584,000 jobs in all of 2025, the weakest annual gain since 2003, excluding major recessions.

For policymakers at the Federal Reserve, the report reinforces a difficult balancing act as inflation stays above target and economic momentum slows.