November CPI report: Cooling inflation gives the Fed doves the upper hand

Market response

December 18, 2025 | 2 min read

Seema Shah

Chief Global Strategist

Magdalena Ocampo

Market Strategist

As the BLS was unable to gather October survey data due to the government shutdown and could not retroactively collect it, this month’s release reflects a change from September to November, introducing additional uncertainty in interpreting price trends.

November consumer prices came in much lower than expected. The annual headline rate was 2.7%, down from 3.0% in September and well below the expected 3.1%. Core inflation, which excludes food and energy prices, rose 2.6% over the past year, also down from 3.0% in September, well below the expected 3.0%, and the slowest pace since 2021.

Although today’s release contains some data collection distortions, the cooling in inflation has eased concerns about runaway prices and remains broadly consistent with the Fed’s view that inflation is not reaccelerating, at least for now.

Report details

This month’s headline and core numbers reflect a two-month change from September to November, rather than the usual month-over-month comparison. For individual segments, the focus is on year-over-year trends instead of the typical monthly changes.

Headline inflation rose 0.2% over September-November, the smallest two-month increase since March-April and well below the year-to-date average of 0.4%. Given the data collection distortions, the notable figure today is the year-over-year increase of 2.7%, down from 3.0% in September and well below the expected 3.1%.
Core inflation, which strips out food and energy, also rose 0.2% over the same two-month period—below the year-to-date average and marking the smallest two-month increase since June of last year. The annual rate slowed to 2.6% from 3.0% in September, marking its lowest level in almost four years.
The energy category saw a reacceleration in prices, posting a 4.2% year-over-year increase, up from 2.8% in September and the highest reading since February 2023. The rise in energy prices was driven by commodities, which posted the first positive year-over-year reading since May of last year, as well as energy services, which have risen meaningfully since the start of the year.
Offsetting the rise in energy prices was food, rising 2.6% year-over-year, a notable decline from September’s 3.1% reading and the lowest reading since February, before Liberation Day. Both food at home and food away from home saw annual rates decline from September.
Core inflation, driven by services prices, cooled amid a slowdown in shelter costs, with the year-over-year rate now at its lowest since August 2021. A similar trend is evident in owner’s equivalent rent, typically the largest contributor to core inflation.
Tariff-sensitive categories showed mixed but ongoing price pressures. Apparel posted a year-over-year increase in November from September, while personal care products and furniture declined from September’s reading, though both remain on an upward trend since the start of the year. This suggests tariffs are still having an impact, even if prices are not accelerating sharply.
The Fed’s preferred supercore inflation measure declined 2.7% over the past year, a meaningful drop from 3.2% in September. Primarily driven by wage costs, since it excludes shelter from core services, supercore inflation has not faced upward pressure, reflecting the ongoing weakness in labor demand.

Policy outlook

While data distortions cannot be dismissed, the sharp drop in annual inflation and the slowest pace of core inflation since 2021 favor the Fed doves and reinforce that this month’s rate cut was warranted, given rising unemployment and cooling prices.

That said, some skepticism around today’s data is likely, and an additional employment and inflation report before the next FOMC meeting in January means nothing is set in stone. Still, today’s figures raise the likelihood of further easing and suggest that the Fed’s dot plot, which currently pencils in just one rate cut for 2026, may be too conservative.

We expect two cuts next year, with a higher probability that they occur in the first half of the year, given the current backdrop: unemployment at a four-year high and annual core inflation easing to its slowest pace in almost four years. Provided the labor market does not deteriorate enough to spark recession fears, this backdrop—characterized by a solid economic environment, cooling inflation, and potentially a few more rate cuts—should be supportive for risk assets.

Macro views

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