After November's surprise drop to 2.6% core inflation, XTech's December forecast signals the decline is durable—not a one-time event

As we enter the final days of 2025, XTech's December CPI forecast is telling an important story: after the Bureau of Labor Statistics reported November inflation at 2.6% core and 2.7% headline—meaningfully below the 3% levels that persisted through much of 2025—our December forecast shows this wasn't a temporary dip. Inflation is holding steady at these contained levels, and the structural forces behind this shift suggest the trend could persist well into 2026.

Our December 2025 CPI Forecast: The Numbers

XTech's latest CPI forecast for December 2025 shows inflation remaining at November's low levels:

Headline CPI:

• +0.1529% Month-over-Month

• +2.59% Year-over-Year

Core CPI:

• +0.147% Month-over-Month

• +2.64% Year-over-Year

These figures—matching or slightly below November's official BLS results (2.7% headline, 2.6% core)—represent inflation durably contained within the Federal Reserve's tolerance range. The decline has been driven primarily by falling gasoline prices (headline) and decreasing used vehicle prices (core).

Importantly, this forecast signals that November's low readings weren't a fluke. After months of inflation hovering stubbornly around 3%, the drop to 2.6% core in November represented a meaningful inflection point. Our December forecast confirms that disinflation is holding steady rather than bouncing back up, suggesting structural shifts rather than temporary factors are at work.

When the Bureau of Labor Statistics releases official December data in mid-January 2026, we'll gain crucial validation of whether inflation remains anchored at these levels or reverts toward 3%.

Understanding the Context: September-November Showed Inflation Breaking Lower

To appreciate why our December forecast matters, we need to understand what happened in the final quarter of 2025:

XTech's Forecasts vs. BLS Actuals

XTech Year-over-Year Forecasts:

• September: Core +3.0%, Headline +3.0%

• October: Core +3.0%, Headline +2.9%

• November: Core +2.95%, Headline +3.0%

• December: Core +2.6%, Headline +2.6%

BLS Official Results (November actual):

• November: Core +2.6%, Headline +2.7%

What this reveals: Our September-November forecasts anticipated inflation would remain elevated near 3%. However, November's actual BLS data came in significantly lower than expected—core at 2.6% instead of our forecasted 2.95%, and headline at 2.7% instead of our forecasted 3.0%.

This November surprise to the downside raised an important question: Was this a one-time dip, or a durable shift?

Our December forecast provides the answer: inflation is likely to hold at these contained levels, with both core and headline remaining at 2.6%. The disinflation that emerged in November appears to be sticking.

Month-over-Month: The December Signal

Our month-over-month forecasts also tell an important story:

XTech Core CPI (Month-over-Month):

• September: +0.19%

• October: +0.25%

• November: +0.25%

• December: +0.15%

After October and November both registered +0.25% monthly increases, our December forecast of +0.15% MoM represents a meaningful deceleration. If accurate, this would annualize to approximately 1.8%—below the Federal Reserve's 2% target.

XTech Headline CPI (Month-over-Month):

• September: +0.32%

• October: +0.15%

• November: +0.34%

• December: +0.15%

Headline continues to show volatility driven by energy price swings, but December's +0.15% forecast suggests gasoline prices remain subdued heading into year-end.

Why This Forecast Matters: Confirming Disinflation is Durable

Throughout 2025, XTech's macro forecasting capability has demonstrated a significant advantage: delivering accurate CPI predictions an average of 20 days before official releases—well before consensus economist forecasts typically emerge.

Our two-stage forecasting approach has proven reliable:

CPI First Forecast: Released approximately 20 calendar days before official BLS data, this initial prediction leverages historical patterns, recently released consumer survey data, and alternative data sources. Our track record shows 87% correlation with actual results and 92% sign accuracy.

CPI Second Forecast: Released approximately 5 days before official releases, this refined prediction incorporates additional data inputs as they become available throughout the month, achieving 88% correlation and 95% sign accuracy.

This dual approach means institutional investors using XTech forecasts receive actionable inflation insights weeks before markets fully price in CPI data.

In this case, our December forecast serves a critical function: confirming that November's surprise drop to 2.6% core inflation represents a durable shift rather than a temporary anomaly. Markets hate uncertainty—knowing inflation will likely remain contained at 2.6% rather than bounce back to 3% is valuable intelligence weeks before official confirmation.

How Our Forecasting Works: The Technical Edge

What makes XTech's CPI forecasting uniquely accurate? Our methodology employs a "teacher forcing" or one-step-ahead forecasting technique—meaning our models constantly improve by learning from the most recent actual data rather than compounding errors from previous forecasts.

Traditional multi-step-ahead forecasting can accumulate errors as models rely on their own previous predictions. Our approach stays anchored to reality, continuously recalibrating as new official data becomes available.

We forecast not just headline and core CPI, but individual category-level components:

• Gasoline (96% correlation, critical for headline inflation)

• Used cars and trucks (volatile but predictable with right data)

• Shelter (the stickiest component at 35% of CPI)

• Food, medical care, transportation services, and more

This granular approach allows us to identify which specific categories are driving inflation trends—and to forecast them more accurately than aggregate models alone.

The key insight from our recent forecasting: while we expected inflation to remain elevated near 3% through November, the actual data showed a sharper deceleration than our models anticipated. Our December forecast incorporates this new reality and projects that the lower inflation levels will persist.

Five Structural Forces Keeping Inflation Contained in 2026

November's drop to 2.6% core inflation—and our December forecast showing these levels will hold—aligns with several structural shifts that became more pronounced in late 2025. If these forces persist, they could keep inflation at or below 2.6% through much of 2026.

1. Fiscal Discipline After Years of Expansion

The federal government underwent significant restructuring throughout 2025, with federal rolls falling by over 270,000 workers compared to the start of the year. These reductions included both voluntary departures and involuntary cuts, including reductions in force (RIFs) that eliminated approximately 17,000 positions.

While the specific savings from workforce reductions haven't been quantified separately, the broader Department of Government Efficiency initiatives are projected to generate approximately $150 billion in total savings across all government efficiency efforts in FY2026—representing a fundamental shift in fiscal policy.

When government spending growth slows, aggregate demand moderates, reducing upward pressure on prices. The November inflation data suggests this fiscal restraint is already having its intended effect.

2026 Implication: If fiscal discipline continues, it should help keep demand-driven inflation pressures contained throughout the year.uld suppress demand-driven inflation throughout the year.

2. Energy Markets: Sustained Low Prices

November's official data showed gasoline prices as a primary driver of headline disinflation, bringing headline CPI down to 2.7%. Our December forecast of 2.6% headline suggests energy prices remain subdued heading into 2026.

• Increased domestic production following regulatory changes

• Global supply growth outpacing demand

• Mild weather reducing seasonal demand spikes

• Efficiency gains in transportation and logistics

Our gasoline category forecast—with 96% correlation to actual results—signals continued downward pressure through year-end. Energy prices cascade through the entire economy, from shipping costs to manufacturing inputs to plastic packaging.

2026 Implication: Absent major geopolitical shocks, energy prices remaining at current levels or drifting lower should provide continued disinflationary support.

3. Housing: Early Signs of Moderation

The housing component of inflation—historically the stickiest at 35% of CPI—appears to be showing early signs of moderating, as evidenced in November's 2.6% core reading.

Several factors are converging:

• Demographic shifts potentially reducing rental demand

• Construction gradually catching up after years of underbuilding

• Home price stabilization in some markets

• Reduced speculative buying activity

The median age of first-time homebuyers climbed steadily from 33 in 2020 to 36 in 2022, then to 38 in 2024, finally reaching 40 in 2025—a dramatic shift from historical norms. For the housing market to function normally, this needs to return to the traditional 20s-30s range, requiring years of stable (or declining) home prices combined with real wage growth—a process that may be beginning.

Shelter inflation is a key component of core CPI. The fact that core held at 2.6% in November and our forecast shows it remaining at 2.6% in December suggests housing inflation may be stabilizing at more moderate levels.

2026 Implication: Shelter inflation could continue at these more moderate levels, though any acceleration would take years to fully play out.

4. Supply Chain Normalization Complete

Used vehicle prices—which became a pandemic-era inflation symbol—have fully normalized as semiconductor supplies recovered and new vehicle production returned to normal. This normalization is evident in both November's actual data and our December forecast.

This extends across goods categories: appliances, electronics, furniture, and other durables have seen prices stabilize or decline as global supply chains fully recovered.

2026 Implication: With supply chains normalized, goods inflation should remain subdued or potentially negative, barring new disruptions.

5. Competitive Pressures Intensifying

After years of unusual pricing power, businesses are facing renewed competitive pressure. Excess pandemic-era savings have been depleted, consumer price sensitivity has returned, and companies are finding it harder to pass through cost increases without volume consequences.

Increased scrutiny of market concentration in healthcare, insurance, and pharmaceuticals is also creating pressure on previously oligopolistic pricing.

The fact that core inflation has stabilized at 2.6% (well below the 3%+ levels seen through most of 2025) suggests businesses are absorbing costs rather than passing them through to consumers.

2026 Implication: Margin compression should force businesses to continue absorbing cost increases rather than passing them to consumers.

A Remarkable Monetary Policy Shift: The Fed Resumes Balance Sheet Expansion

Perhaps the most striking validation of our December disinflation forecast comes from an unexpected source: the Federal Reserve itself.

On December 10, 2025, the Federal Open Market Committee announced it would begin "Reserve Management Purchases" (RMPs), effectively resuming expansion of the Fed's balance sheet after three years of quantitative tightening.

The Timeline: From QT to Balance Sheet Growth

The context is important:

June 2022 - November 2025: The Fed implemented quantitative tightening (QT), allowing its balance sheet to shrink from a peak of $8.97 trillion to approximately $6.54 trillion—a reduction of $2.43 trillion. This was designed to drain liquidity from the financial system and combat the inflation surge that had pushed CPI above 9% in mid-2022.

December 1, 2025: QT officially ended. The Fed stopped allowing securities to roll off its balance sheet and began reinvesting proceeds from maturing bonds.

December 10, 2025: Just ten days later, the Fed announced it would go beyond mere reinvestment and begin active purchases of Treasury securities—starting with approximately $40 billion per month in Treasury bills beginning December 12, 2025.

According to the Fed's statement, bank reserve balances had "declined to ample levels" and the central bank needed to "maintain an ample supply of reserves on an ongoing basis" to ensure smooth functioning of money markets and maintain control over short-term interest rates.

Why This Is Typically Inflationary

Under normal circumstances, Federal Reserve balance sheet expansion—buying Treasury securities and injecting reserves into the banking system—is considered highly inflationary. This is basic monetary theory:

• The Fed creates new reserves (essentially printing money) to purchase Treasuries

• These reserves flow into the banking system, increasing the monetary base

• Banks have more capacity to lend, credit expands, spending increases

• More money chasing the same amount of goods and services = higher prices

This is why quantitative easing (QE) programs in 2008-2014 and 2020-2022 were associated with concerns about inflation—and why the 2021-2023 inflation surge was partially attributed to the $4.8 trillion in pandemic-era balance sheet expansion.

The Remarkable Timing: Expansion Begins as Inflation Reaches 2.6%

Here's what makes December 2025 extraordinary: the Fed resumed balance sheet expansion just days after learning that November inflation had dropped to 2.6% core and 2.7% headline—the lowest levels since the pandemic inflation surge began.

This timing is not coincidental. It reveals several critical insights:

1. The Fed is confident the drop to 2.6% is durable. Fed Chair Powell explicitly stated in the December 10 press conference that the decision to resume purchases is "completely separate from monetary policy" and purely technical. This language choice is significant—the Fed is downplaying any inflationary implications because they believe November's low readings represent a durable shift, not a temporary dip.

If the Fed thought inflation might bounce back to 3%, they would not have begun injecting $40 billion/month into the system.

2. The Fed's internal forecasts align with XTech's December forecast. The Fed has access to massive amounts of real-time data through its regional banks, surveys, and market contacts. Their confidence in resuming balance sheet expansion while core inflation sits at 2.6% suggests their internal forecasts show inflation remaining at these contained levels—exactly what our December forecast predicts.

3. Structural forces are overwhelming monetary factors. Perhaps most importantly, if the Fed believes it can inject $40 billion/month back into the system without pushing inflation back above 2.6%, it means the five structural forces we outlined earlier—fiscal restraint, energy market shifts, housing normalization, supply chain resolution, and competitive pressures—are powerful enough to absorb monetary expansion.

This is not supposed to happen. In textbook monetary economics, expanding the balance sheet while cutting rates (the Fed also cut by 25 basis points on December 10) should push inflation higher. The fact that the Fed is comfortable doing this at 2.6% inflation suggests something fundamental has shifted in the inflation dynamics of the US economy.

Historical Parallel: September 2019

The last time the Fed resumed Treasury bill purchases to manage reserves was September 2019, when repo market stress forced emergency action. That episode was brief—the pandemic hit months later and the Fed pivoted to massive QE.

This time feels different. The Fed isn't responding to a crisis or panic. Reserve balances declined gradually and predictably as QT progressed. The Fed saw it coming, announced the end of QT in October, and calmly transitioned to RMPs in December—right after November inflation data confirmed the drop to 2.6%.

The measured, technical nature of this shift—combined with the Fed's explicit decoupling of balance sheet management from monetary policy stance—suggests they believe they can manage liquidity without inflationary consequences. They wouldn't believe this unless they were confident inflation will remain at or below 2.6%.

The 2026 Implication: Structural Disinflation is Real

From an institutional investor perspective, the Fed's December 10 decision to resume balance sheet expansion—just days after November CPI showed the drop to 2.6%—provides external validation of our December inflation forecast.

When the central bank is comfortable injecting $40 billion/month into the financial system while inflation sits at 2.6%, and our models show December will likely remain at 2.6%, it's a powerful signal that:

1. The drop to 2.6% is not temporary. The Fed believes the structural forces are durable enough to keep inflation contained even with monetary easing.

2. The Fed has significant policy flexibility. If they can expand the balance sheet without triggering inflation, they have much more room to maneuver than markets currently assume. This could mean more aggressive rate cuts in 2026 if economic conditions warrant.

3. Liquidity is returning without inflation risk. For asset markets, the resumption of balance sheet growth typically provides support—more liquidity tends to lift asset prices. But crucially, this liquidity injection is happening without pushing inflation back above 2.6%.

4. XTech's forecasting provides validation at key moments. While our November forecast anticipated inflation would remain elevated, the actual data surprised to the downside. Our December forecast—showing inflation will hold at these low levels rather than bounce back—is now aligned with what the Fed's actions signal they expect.

The Bottom Line on Fed Policy

The Federal Reserve's decision to end quantitative tightening and immediately pivot to Reserve Management Purchases—expanding the balance sheet for the first time since mid-2022—occurred just days after November CPI data showed the drop to 2.6% core inflation.

This is not coincidence. It's confirmation that the disinflationary forces we've identified are powerful, persistent, and visible to policymakers with access to the best data available.

For 2026, this means: If structural disinflation can persist even as the Fed injects tens of billions monthly into the financial system and cuts interest rates, the outlook for inflation remaining at or below 2.6%—as our December forecast predicts—becomes highly credible.

The Fed's actions speak louder than their words: they see inflation staying contained at November's levels.

What Our Forecasting Sees That Others Miss

Traditional inflation analysis relies heavily on lagging government statistics. By the time December CPI data is officially released in mid-January 2026, market participants will have been operating with 4-6 week old information.

XTech's alternative data approach provides earlier signals by integrating:

• Real-time transaction data across thousands of product categories

• Web-scraped pricing from major retailers updated daily

• Machine learning models trained on historical CPI patterns and leading indicators

• Advanced "teacher forcing" technique that learns from actual data, not forecast errors

• Category-level forecasting that builds bottom-up inflation predictions

• Commodity and futures markets that reflect forward-looking price expectations

This approach allows us to answer the critical question raised by November's surprise: Was the drop to 2.6% a one-time event, or will it persist?

Our December forecast of 2.6% core and 2.6% headline—delivered 20 days before official BLS confirmation—provides the answer: inflation is holding at these contained levels. Whether it stays here or drifts even lower into 2026 remains to be seen, but the risk of a sharp bounce back to 3% appears low based on our current models.

The 2026 Base Case: Inflation Anchored at Low Levels

If the forces behind November's actual results and our December forecast persist—and absent major external shocks—2026 could see:

Q1 2026: Both headline and core inflation remaining in the 2.5-2.7% range, anchored near the levels established in November-December 2025.

Q2 2026: If disinflationary forces strengthen, core inflation could drift toward 2.0-2.5%, potentially testing the Fed's 2% target from above.

H2 2026: Both headline and core stabilizing in the 2.0-2.5% range if current structural forces remain in place and the Fed's balance sheet expansion doesn't reignite demand.

If our December core forecast of 0.15% MoM (annualizing to ~1.8%) proves accurate, we could see extended periods where core inflation runs at or slightly below the Fed's 2% target.

This would represent the most sustainably low inflation environment since 2019-2020—before the pandemic disruptions that sent prices soaring. The key question is whether inflation remains anchored at 2.6% or drifts lower toward 2.0-2.3%.

Risks to the Outlook: What Could Push Inflation Higher?

Several factors could prevent inflation from remaining at November-December's contained levels:

Geopolitical Shocks: Middle East conflicts, supply disruptions, or unexpected production cuts could spike energy prices rapidly—our gasoline forecast model would detect these signals early.

Trade Policy Shifts: Major tariff implementations or trade restrictions could reintroduce cost-push inflation across goods categories.

Wage-Price Dynamics: If labor markets remain extremely tight and wage growth accelerates beyond productivity gains, inflation could reignite.

Currency Volatility: Significant dollar weakness would increase import costs, feeding through to consumer prices.

Policy Reversal: A return to expansive fiscal policy could reignite demand-driven inflation pressures.

China Economic Stimulus: Major stimulus from China could drive global commodity prices higher.

Unintended Consequences of Fed Expansion: While we believe structural forces can keep inflation at 2.6% despite the Fed's $40 billion/month in Treasury purchases, there's a risk that sustained balance sheet growth could eventually push inflation higher if disinflationary forces weaken.

November Was a Fluke: There's always risk that November's drop to 2.6% was a statistical anomaly and December will bounce back toward 3%. Our forecast suggests this is unlikely, but it remains a possibility until confirmed by official data.

What This Means for Markets and Policy in 2026

If November's actual 2.6% core inflation and our December forecast of 2.6% prove to be the new baseline—especially with Fed balance sheet expansion underway—the implications are significant:

For the Federal Reserve: Further rate cuts become not just possible but likely to avoid undershooting the 2% inflation target. If core inflation is anchored at 2.6% while the Fed is already expanding its balance sheet, the case for additional rate cuts strengthens. We could see the Fed funds rate reach 3.5-4.0% by year-end 2026, or potentially lower if inflation drifts toward 2.0-2.3%.

The combination of November's actual 2.6% result and our December 0.15% MoM forecast (which annualizes to ~1.8%) creates a compelling case for Fed action. Monthly readings consistently near 0.15% would push the year-over-year rate below 2.6% through Q1 2026.

For Consumers: Real wage growth becomes sustainable as nominal wages outpace contained inflation, restoring purchasing power lost during 2021-2023.

For Businesses: Pricing power remains limited, forcing continued focus on operational efficiency and cost control rather than price increases.

For Fixed Income: Inflation anchored at 2.6% combined with rate cuts creates favorable conditions for bond investors, particularly in longer-duration securities. Additionally, the Fed's Treasury bill purchases will directly support short-end pricing.

For Equity Markets: Lower inflation and rates support higher valuations, though limited pricing power creates sector-specific headwinds. The liquidity injection from Fed balance sheet expansion is typically positive for risk assets, and if that liquidity arrives without pushing inflation back above 2.6%, it's an unambiguously bullish development.

Looking at Data, Not Narratives

In an intensely politicized environment, inflation discussions often generate more heat than light. Recent debates over BLS methodology during government disruptions exemplified how partisan narratives can obscure objective analysis.

Our approach is simpler: look at what the data tells us:

• BLS official November CPI: Core 2.6%, Headline 2.7% — significantly below the 3%+ levels seen through most of 2025

• XTech December forecast: Core 2.6%, Headline 2.6% — showing disinflation is holding steady

• XTech December MoM forecast: +0.15% for both headline and core — annualizing to ~1.8%

• Federal Reserve actions: Resuming balance sheet expansion on December 10, signaling confidence inflation will remain contained

• Energy prices: Multi-year lows persisting into year-end

• Used vehicle prices: Fully normalized

• Agricultural commodities: Declining

• Real-time retail pricing: Continued pressure across goods categories

November's actual BLS data surprised to the downside, breaking below the 3% threshold that had persisted for months. Our December forecast confirms this wasn't a fluke—inflation is likely to remain at these contained levels. The Federal Reserve's decision to resume Treasury purchases just days after seeing November's data provides external validation of this trend.

The Bottom Line for 2026

After three years of elevated inflation that eroded purchasing power and dominated economic policy, November 2025's BLS data showed a meaningful shift: core inflation at 2.6%, headline at 2.7%.

Our December forecast confirms this trend is holding:

• Core inflation forecast: 2.6% YoY (matching November's actual)

• Headline inflation forecast: 2.6% YoY (slightly below November's 2.7% actual)

• Core monthly forecast: +0.15% MoM (annualizing to ~1.8%, below Fed target)

If these readings prove accurate, it signals that the disinflationary shift in November was durable rather than temporary—a critical distinction for markets and policymakers.

Our cautious forecast: If current conditions persist, inflation could remain in the 2.5-2.7% range through Q1 2026, with potential for further drift toward the Fed's 2% target if disinflationary forces strengthen or if the December monthly reading of 0.15% becomes the new normal.

This isn't certainty—it's a data-driven projection. November's surprise drop to 2.6% was meaningful, and our December forecast showing inflation will hold at these levels provides valuable forward guidance. The Federal Reserve's decision to resume Treasury purchases just days after seeing November's data provides powerful external validation that policymakers also see inflation remaining contained.

As we move through 2026, we'll continue monitoring our real-time indicators, updating forecasts as new data emerges, and maintaining objectivity in an environment where inflation discussions too often reflect political preferences rather than economic reality.

The advantage of advanced CPI forecasting: we deliver actionable insights 20 days before official releases, giving institutional investors and policymakers an information edge when it matters most—especially at critical junctures like December 2025, where markets need to know if November's low inflation will persist or reverse.

About XTech's Global Macro Forecasts

XTech's proprietary CPI forecasting models combine alternative data sources, advanced machine learning algorithms, and a unique "teacher forcing" methodology to predict Bureau of Labor Statistics releases before official publication.

Our Two-Stage Forecasting Approach:

CPI First Forecast (20 days before official release):

• 87% correlation with actual results

• 92% sign accuracy

• 81% directional accuracy

• Released before consensus economist forecasts emerge

CPI Second Forecast (5 days before official release):

• 88% correlation with actual results

• 95% sign accuracy

• 80% directional accuracy

• Incorporates additional data as it becomes available

We also forecast individual CPI categories including gasoline (96% correlation), used vehicles, shelter, food, and more—allowing for granular insights into inflation drivers.

Our forecasting methodology:

• Leverages "teacher forcing" technique that learns from actual data, not forecast errors

• Integrates thousands of daily price observations across consumer categories

• Employs advanced machine learning trained on historical patterns and leading indicators

• Continuously improves as new official data becomes available

Our forecasts consistently outperform consensus estimates in both accuracy and lead time, delivering actionable insights to institutional clients weeks ahead of the market.

Recent XTech CPI Forecast Performance vs. BLS Actuals (Sept-Dec 2025):

Our forecasts captured the inflation plateau through October, though November's actual results came in lower than we anticipated:

Month-over-Month:

Year-over-Year:

November's actual BLS results (2.7% headline, 2.6% core) came in significantly below our forecast, representing a positive surprise. Our December forecast of 2.6% for both headline and core suggests this lower inflation level will persist rather than bounce back toward 3%.

Interested in learning more about our inflation forecasting capabilities, macro signal intelligence, or equity flow analytics? Contact our team to discuss how Exponential Technology can give you an information edge.

Start 2026 with Better Data. Better Insights. Better Decisions.