U.S. inflation moderates across key sectors

Hello everyone. Welcome to market weekend review for the week of December 19th, 2025. My name is Bay Chin. I'm a senior investment strategist and head of Canadian strategy here at Russell Investments. Today we're going to be discussing three topics. First, inflation in the US as well as globally. What was the encouraging news? Next, we'll talk about the European Central Bank and the Bank of England. How did those two rate decisions differ? And finally, we'll give a recap of 2025 market performance and what investors should keep in mind going into 2026. So, let's get started. First, in terms of the inflation dynamics inside of the United States and more globally, we got some encouraging news this week. Let's start off with the inflation picture in the United States. The inflation report released this week showed that inflation in the US on both a core and headline basis surprised to the downside. Headline inflation was only 2.7% year-over-year and core inflation was only 2.6% year-over-year versus consensus expectations of approximately 3.1 and 3% year-over-year respectively. When you look at the decomposition of the inflationary pressures, what you're seeing is that this encouraging news was pretty broad-based. So, for example, take shelter inflation. Our measure of core shelter inflation, which we define as rent prices as well as owner's equivalent rent, that measure fell to the lowest pace of year-over-year inflation since 2021. We look at durable goods prices. We also saw some moderation in durable goods price pressures despite the potential impact of tariffs. So ultimately we had a pretty broadbased cooling effect in inflationary pressures. Now even though today's report was encouraging, we didn't really see significant movement in bond markets after the inflation report was released this Thursday. And I think one of the reasons for that is because ultimately the Thursday inflation report that was released is only one of many indicators that the Federal Reserve will have access to before they have to make their next decision at the end of January of 2026. They're going to get more inflation data. They're going to get more growth data. They're going to get more labor market data. So, in terms of our outlook for 2026, when we think about the mix of growth, labor market, and inflation data, what we're seeing is an economy that's likely to have strong growth in 2026. What we're seeing is a labor market that's cooled but hasn't totally cracked just yet. And what we're seeing is inflation. Even though in the near term there might still be some bumps here and there, generally speaking, we do think that the Federal Reserve will succeed in its mission to bring inflation down to the 2% target over that medium-term. And so what that means for interest rates is we expect that the Federal Reserve will continue making rate cuts into 2026, but we also think they're going to slow down the pace of those rate cuts. We think that they might only cut interest rates once next year and eventually we think that they're going to stop cutting interest rates once they get close to three and a quarter percent which is our estimate of the neutral rate of interest, the rate that neither helps nor hurts economic activity. Looking more globally, we also saw encouraging inflation data in Canada and the United Kingdom. Core inflation in Canada edged down in November compared to the prior month. We also saw year-over-year accordlation edge down in the United Kingdom as well in the month of November. Ultimately, as I think about central bank trajectories into 2026, in terms of the Bank of Canada, even though the markets are pricing in one rate hike into 2026, I still think it's too early to be thinking about rate hikes in Canada. While it's true that we've we've seen some encouraging economic data, the fact of the matter is Canada still remains in a very fragile economic environment. And against that backdrop, I think the Bank of Canada is still more focused on the growth side of the equation rather than on the inflation side of the equation. In terms of the Bank of England, they made a rate cut today on December 18th, 2025. The vote was a little bit split. It was 5 to4, but in the UK, it's common to have split decisions when it comes to central bank policy. As we look ahead into 2026, we expect that the Bank of England will gradually continue to lower interest rates over time until they get interest rates to a more neutral level, which for them we estimate is around 3%. The ECB also held their central bank meeting this week. They left interest rates unchanged as expected. During the press conference, a reporter did try to ask ECB President Christine Lagarde if they intend to potentially raise interest rates in 2026, but ultimately President Lagarde responded that the ECB is going to continue to be data dependent and their path is not on a preset course. Finally, in terms of a quick recap of market performance this year, we've seen some pretty strong results across a range of asset classes, whether it's traditional equities, whether it's infrastructure, and what we're seeing is that these results were pretty robust despite the volatility that occurred in April of this year. And I think this is a particularly powerful reminder to investors of the importance of staying invested, staying disciplined, and really focusing in on the long term when it comes to investment decision-making. Thank you everyone for tuning in. We wish everyone happy holidays, and we will see you next time in 2026 on the next edition of Market Weekend Review. >> Hi, I'm Sophie Antelj, head of portfolio and business consulting at Russell Investments. If you liked what you just saw and heard, consider subscribing to our YouTube channel or check us out on LinkedIn. Thanks for tuning in.