Inflation Outlook: Will We Reach the Government's Objective?

January 20, 2026

Consumer inflation declined over the course of 2025, driven by a gradual easing in core services. Although, it remains above the Federal Open Market Committee’s long-term 2% target. According to the U.S. Department of Labor, the December Consumer Price Index (CPI) registered at 2.7%, unchanged from November, but down from 2.9% at the end of 2024. While inflation has made progress, it is yet to fully return to the Fed’s stated objective.

The Inflation Path in 2025

Expectations for the inflation path shifted meaningfully throughout 2025. When new tariffs were introduced in the spring, many economists feared they could push inflation further in the wrong direction. As the year concluded, the inflationary impact of those tariffs proved more muted than initially anticipated, suggesting limited pass-through to consumer prices. This allowed inflation to remain at or below 3% throughout the year. 

What's Next for Inflation?

Inflation in the coming months could remain sticky or even drift modestly higher, particularly if larger-than-average tax refunds boost near-term consumer spending. Larger refunds give consumers more spending power, potentially placing short-term upward pressure on prices. Many economists expect inflation to resume its downward trajectory in the second half of the year, as the effects of tariffs continue to fade.

Why Does Inflation Matter?

Inflation matters to all consumers because it reflects the price changes we experience in everyday life. While inflation has been declining, this does not mean prices are falling (that is deflation). Instead, the economy is experiencing disinflation, meaning prices are still rising but at a slower pace. In practical terms when planning your budget for 2026, keep in mind prices are likely to continue rising, just more gradually than in recent years.

Inflation and the Fed

Inflation is also critical to the broader economy. Maintaining price stability is one half of the Federal Reserve’s dual mandate, alongside promoting maximum employment. As a result, inflation plays a central role in shaping the Fed’s monetary policy decisions. After cutting rates at the final three policy meetings of 2025, the Fed is expected to remain in a wait-and-see mode. The latest inflation reading does little to alter that outlook.

How this Impacted Interest Rates

Fixed income yields declined during 2025 as the Federal Reserve cut rates. The bond market currently expects two additional rate cuts in the second half of 2026. Despite this decline, interest rates remain attractive relative to historical levels, and current yields continue to be a strong indicator of future bond returns.  Reach out to your advisor to discuss how your portfolio is positioned for success in 2026 and beyond. Your financial success matters.