US inflation outlook: could slowing price growth lead to rate cuts in 2026?

The pace of US price growth remains a focal point for global markets. After two years of monetary tightening, the annual US inflation rate rose to 3% in September 2025, up slightly from 2.9% in August, according to the U.S. Bureau of Labor Statistics. This modest rise follows several months of easing price pressures, reflecting a delicate balance between steady growth and cooling demand.

With energy costs creeping higher and the Federal Reserve signalling caution on future policy, the question now turns to 2026: will slowing inflation pave the way for rate cuts, or will policymakers maintain current levels to safeguard price stability?

What is inflation and why does it matter?

Inflation refers to a general rise in the prices of goods and services. Central banks, such as the Federal Reserve (the Fed), manage inflation to preserve purchasing power and economic stability.

The Fed’s preferred inflation measure is the personal consumption expenditures (PCE) index, published monthly by the U.S. Department of Commerce. It captures shifts in consumer spending more accurately than the consumer price index (CPI), produced by the U.S. Bureau of Labor Statistics. Both indicators remain vital for assessing the health of the US economy.

The Fed targets an average inflation rate of 2% over the long term, consistent with its dual mandate of maximum employment and stable prices. Persistent deviations from this target – either above or below – usually prompt monetary policy action.

US inflation history

Following the Covid-19 pandemic, inflation in the US rose to its highest level in four decades. Fiscal stimulus, supply-chain disruption and geopolitical tension pushed consumer prices to a peak of 9.1% in June 2022, while PCE inflation reached 6.8%.

In response, the Fed launched one of its fastest rate-hike cycles in history, raising the federal funds rate from near zero to over 5% by mid-2023. The aim was to cool demand, ease wage pressures and bring inflation closer to the 2% goal.

By late 2024, inflation had moderated considerably, but 2025 brought new challenges. Headline inflation has stabilised around 3%, signalling a slower route back to the target.

Breaking down the 2025 inflation data

According to the U.S. Bureau of Labor Statistics, the annual inflation rate rose to 3% as of November 2025, up from 2.9% in August and slightly below expectations of 3.1%.

• Energy prices rose 2.8% year on year, the highest since May 2024, with fuel oil up 4.1%.
• Gasoline prices fell 0.5%, moderating from a 6.6% drop in August.
• Natural gas inflation eased to 11.7% from 13.8%.
• Core inflation (excluding food and energy) slipped to 3% from 3.1%.

On a monthly basis, prices rose 0.3%, mainly due to higher fuel and transport costs. Food inflation slowed slightly to 3.1%.

This mixed picture shows that while underlying pressures have softened, energy and housing continue to influence overall inflation.

Past performance is not a reliable indicator of future results,

Source: Trading Economics, 24 November 2025.

How inflation affects markets and traders

Inflation is one of the most closely monitored indicators in global markets. It influences interest rate expectations, bond yields and currency values, particularly the US dollar (USD).

Higher-than-expected inflation often strengthens the USD, as markets anticipate tighter policy. Conversely, lower readings may weaken the currency and support risk-sensitive assets such as equities and commodities.

In 2025, a combination of moderating inflation and measured Fed policy has produced periods of relative market calm, though volatility still reacts to key data releases.

For CFD traders, these shifts can drive price movements in indices such as the US 500, US Tech 100, and the US Dollar Index (DXY) – all available to track in real time on platforms like Capital.com.

Past performance is not a reliable indicator of future results.

Historical parallels and lessons learned

Today’s inflation cycle invites comparison with the 1970s and early 1980s, when oil shocks led to prolonged price rises. The Fed then faced similar trade-offs between stabilising prices and maintaining growth.

However, key differences stand out:

• The labour market remains resilient, though growth has slowed.
• Supply chains have largely normalised.
• Policy communication is more transparent, helping to reduce uncertainty.

These factors support expectations of a potential soft landing, where inflation moderates without a severe downturn.

Release calendar: what to watch in early 2026

Key data releases to watch include the Consumer Price Index (CPI) and Producer Price Index (PPI) – both published monthly.

Upcoming releases:

• CPI data for December 2025 – 15 January 2026
• PPI data for December 2025 – 14 January 2026
• Employment Cost Index – 31 January 2026

These will offer early insights into price trends for 2026, helping policymakers and traders assess the inflation trajectory.

Source: U.S. Bureau of Labor Statistics, 24 November 2025

Key takeaways

The US inflation narrative in 2025 has been one of gradual normalisation amid ongoing uncertainty. The data suggest that the worst of the post-pandemic surge has passed, but the final phase of disinflation could prove the most challenging.

Inflation remains above the 2% goal, yet the overall direction is encouraging. Whether this leads to rate cuts in 2026 will depend on sustained evidence that prices are slowing without compromising stability.

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