12/19/25: Inflation Slows; Labor Market Shows Signs of Cooling

Although the data lag from the government shutdown remains a factor, this week provided a slew of catch-up economic data from government sources. Labor market data whipsawed during the shutdown, and inflation trended lower.

Inflation came in lower than expected in November, with the Consumer Price Index (CPI) decelerating to 2.7% year over year and core CPI easing to 2.6%. Notably, both Owners’ Equivalent Rent and Rent of Primary Residence contributed to the slowdown in services inflation. Shelter costs typically lag broader market trends by 12 to 18 months. Services, meanwhile, have remained the dominant driver of inflation throughout the post-pandemic period.

This week’s labor market data included the Nonfarm Payrolls reports for both October and November. October showed unexpected weakness, with payrolls down by 105,000 jobs—largely reflecting the removal of thousands of federal employees who accepted deferred resignation offers under the Trump administration. In November, payrolls partially rebounded with a gain of 64,000 jobs, though the unemployment rate ticked up to 4.6%. Initial Jobless Claims remained low at 224,000 for the prior week, while Continuing Claims edged slightly higher to 1.89 million. Overall, the data suggests ongoing moderation in labor market conditions.

October Retail Sales, released with a one-month delay, were flat from the prior month but up 3.5% year over year. Eight of thirteen major categories posted gains, while motor vehicle sales declined following the expiration of federal tax incentives for electric vehicles, and gas station sales weakened amid lower fuel prices.

The yield curve steepened this week with the 2-year/10-year spread at 66 basis points as of writing, which is near the steepest the curve has been in 2025. The Chandler team continues to favor being overweight benchmark duration, while maintaining the view of a steepening yield curve with the pace of steepening moderating through the first half of 2026. This week, the 2-year point on the curve edged down to 3.47%, the 5-year was at 3.67%, and the 10-year was at 4.13%. Short-term rates are effectively pricing in one more rate cut in early 2026.

Next week: Building Permits, New Home Sales, Chicago Fed National Activity Index, Housing Starts, Building Permits, Construction Spending, New Home Sales, GDP QoQ, Durable Goods Orders, Industrial Production, Conference Board Consumer Confidence.

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