Will 2026 bring economic relief to the American middle class?
In early 2026, affordability concerns have Americans questioning their financial stability.
The Labor Department announced on January 13 that U.S. consumer prices rose 2.7% in December from a year earlier, roughly in line with forecasters’ expectations.
The final Consumer Price Index report for 2025 caps a year in which inflation gradually eased but remained uneven across the economy. The annual inflation rate briefly rose to 3% in September, but returned to 2.7% in November, reflecting the small increase in prices of items such as gasoline and new cars.
Consumer prices rose 0.3% from November to December, according to a new report.
Price increases were driven by rising housing and food costs, which rose 0.4% and 0.7%, respectively, over the month. Energy prices also rose by 0.3% in December. Over the past 12 months, the energy index rose 2.3% and the food index rose 3.1% as some Americans noticed higher electricity bills and struggled to buy groceries.
Economists had hoped the December report would be a clearer indicator of U.S. inflation trends after last year’s government shutdown affected the previous CPI release, but some analysts believe the new report was also affected.
“Distortions caused by the government shutdown have made inflation statistics difficult to interpret, but recent numbers suggest that inflation has peaked,” Michael Pearce, chief U.S. economist at Oxford Economics, said in a Jan. 13 note. “We believe price increases due to tariffs have been largely avoided and we expect further disinflation of services inflation in 2026 to bring inflation closer to our 2% target by year-end.”
Bankrate financial analyst Stephen Cates said consumers “can breathe a sigh of relief” that annual inflation did not jump back to 3%.
“Today’s results do not indicate further progress in inflation, but they also do not represent a step backwards,” Cates said in a separate Jan. 13 note. “It turns out the November CPI wasn’t a lie after all.”
What is the core inflation rate in the United States?
Core inflation, which excludes volatile food and energy prices, which is closely monitored by Federal Reserve policymakers, rose 2.6% over the past 12 months, in line with the previous month.
Are gas prices still falling?
Gasoline prices fell 0.5% in December and fell 3.4% for the year. The average price of regular unleaded was $2.82 per gallon as of Jan. 13, down from $2.92 last month and $3.07 last year, according to AAA.
Consumers expect price increases
According to the New York Fed’s December Consumer Expectations Survey, consumers expect near-term inflation to rise to 3.4% and believe it will become more difficult to service their debts over the next three months.
Economists say consumer sentiment reflects uneven financial conditions across income groups, and some households could see temporary relief from large tax refunds in 2026.
Will the Fed cut rates in January?
December’s CPI report will help Fed policymakers decide on their next interest rate decisions after a two-day meeting at the end of January. At 2.7%, measured in December, inflation remains above the Fed’s 2% target.
Mike Scordeles, Trust’s head of U.S. economics, previously told USA TODAY that the decline in the unemployment rate from November to December dampened expectations for further cuts in the Fed’s benchmark interest rate.
“With unemployment remaining low, growth above trend, fiscal stimulus having an offsetting effect, and inflation above target, the Fed feels comfortable keeping interest rates on hold this month and likely over the next several meetings,” Seema Shah, chief global strategist at Principal Asset Management, said in a statement to USA Today. “However, a disinflationary trend is gradually taking shape. As tariff pass-through effects become clearer and inflation concerns subside, the Fed is likely to shift to a stance that justifies one or two more rate cuts.”
Although the decision is not expected to be unanimous, forecasters now widely expect the Federal Open Market Committee to keep its target range for interest rates at 3.5% to 3.75%, following three consecutive rate cuts late last year.
The January meeting will be the first since news broke that the Justice Department was investigating Fed Chairman Jerome Powell, raising concerns about the central bank’s independence.
“While we do not expect this to change the near-term direction of monetary policy, it will make the job of the next Fed chair more difficult to build consensus among the 19 members of the Federal Open Market Committee,” Wells Fargo economists said in a Jan. 12 report on the federal survey.
This is a developing story and will be updated to add new information.
Contact Rachel Barber at rbarber@usatoday.com and follow her at X @rachelbarber_
