Fresh readings on consumer and wholesale inflation showed prices remain sticky, underscoring expectations that Federal Reserve officials will not cut interest rates in the near term.
Fed officials, meanwhile, are studying the data to predict what inflation might do through 2026 — and how that charts their course for interest rate decisions this year.
Wholesale prices — which measure inflation before it reaches consumers — rose 3% in November and 2.8% in October, according to a delayed report from the Labor Department released Wednesday. The report combined November and October data into one release because the government shutdown pushed it back.
A jump in energy prices inflated measures. But even after accounting for energy and volatile food prices and trade services, wholesale prices climbed 3.5% for the 12 months ended in November, the largest 12-month increase since rising 3.5% in March.
Prices looked hot on their face, but on closer look, the Bureau of Labor Statistics’ Producer Price Index showed wholesale inflation was more modest.
The delayed October and November index was higher than most expected toward the end of last year, but that was largely due to revisions to the September data.
“There were at worst only tentative tariff effects for the Fed to be conc
erned about, with the core personal consumption goods PPI rising by a stronger 0.5% in both September and October, although it then fell by 0.1% in November,” Stephen Brown, deputy chief North America economist for Capital Economics, wrote in a note.
On Tuesday, a new reading on consumer prices for December showed inflation remained sticky to close out 2025. The Consumer Price Index on a “core” basis, which excludes volatile food and energy prices, clocked in at 2.6%, a tenth of a percentage point below expectations for 2.7%. However, 2.6% was the same level seen from September through November and remains above the Fed’s 2% target.
Brown said using data from the consumer and wholesale price releases, his preliminary estimate suggests that the Personal Consumption Expenditures index on a “core” basis — the Fed’s preferred measure of inflation — could rise to 3%, having been unchanged at 2.8% by his estimates for the prior three months.
The Fed’s Beige Book, a compilation of anecdotal evidence across the central bank’s 12 districts, showed that cost pressures from tariffs were a consistent theme for the first couple of weeks of January.
Companies that initially absorbed tariff-related costs were beginning to pass them on to customers to preserve profit margins, though some industries — like retail and restaurants — were reluctant to do so. Businesses expect some moderation in price growth but foresee prices remaining elevated as they work through increased costs, according to the report.
Overall, the economy appeared to pick up slightly in eight of the 12 Fed districts, with three districts reporting no change and one reporting a modest decline. That marked an improvement over the past three report cycles, where a majority of districts reported little change.
Fed officials dig into the data
Philadelphia Fed president Anna Paulson said Wednesday that she sees increases in prices due to tariffs as mostly confined to prices of goods, not services — stressing that this does not create sustained inflation. Paulson said she expects the impact from tariffs to hit in the first half of the year and for the increase in prices of goods to return to 2% — the Fed’s inflation goal — in the second half of the year.
“I am feeling cautiously optimistic on inflation, and I see a decent chance that we will end the year with inflation that is close to 2% on a run-rate basis; that is, 12-month inflation may still be a little elevated, but three-month inflation will be 2% by the end of the year,” Paulson said.
With the expectation of inflation moderating and what Paulson sees as a stabilizing job market, she anticipates “some modest further adjustments” to interest rates later in the year.
Fed governor Stephen Miran said Wednesday that he expects disinflation from services and shelter to offset increases in goods prices and has penciled in 150 basis points of rate cuts for this year. That’s beyond the median Fed member’s estimate for one 25 basis point rate cut this year.
Miran said he thinks rates need to come down because the so-called neutral rate — the level on the Fed’s benchmark policy rate designed to neither spur nor slow growth — is lower because immigration policy has pushed down population growth, which he expects to push inflation lower.
He doesn’t think tariffs are driving up prices for goods, but as to what’s driving them higher is “an open question.”
“I don’t have an easy answer to that,” Miran said. “I think there’s a few possibilities, none of which are really that satisfying,” including continued reverberations from the pandemic and international developments like export controls in the tech sector.
Minneapolis Fed president Neel Kashkari said Wednesday he thinks inflation is heading down, but it’s a question of how quickly.
“The question is [inflation] going to be a 2.5% by the end of the year, something short of that, or something above that? I don’t know. I don’t have a lot of confidence in that,” Kashkari said.
He said he’s confident housing inflation is trending down, but he is looking at the persistence of inflation for goods prices, as well as whether services inflation is continuing to drop.
Kashkari cautioned that the Fed has only one blunt instrument — interest rate setting — and that while higher-income Americans are doing fine, lower-income Americans are suffering because of inflation, not because they don’t have jobs.
“That’s a trick for the Federal Reserve. If we said, ‘Hey, let’s go cut interest rates to try to boost the labor market and boost families,’ perversely, that might actually make the inflation problem worse,” he said. “The thing that is causing that hardship for those families may not get better if we were to aggressively cut interest rates right now, even though it might help the labor market on the margin.”
Kashkari thinks the economy is doing well and that strong consumer spending and investment in AI will continue this year.
“Overall, the economy seems quite resilient. I had expected that with higher rates we’d see more of a slowing,” Kashkari said. “That makes me question how tight policy is right now.”
The Fed is expected to hold rates steady at its policy meeting at the end of January in the range of 3.5%-3.75%, after cutting rates three times last fall.
