Key takeaways
- U.S. price pressures ease
- UK lowers rates by 0.25%
- 2025 shows importance of staying invested
U.S. inflation cools
This week delivered welcome news on inflation in the United States. The November report showed headline inflation slowing to 2.7% year-over-year and core inflation easing to 2.6%—both below consensus expectations of 3.1% and 3%, respectively. The improvement was also broad-based, spanning shelter, durable goods, and other core components. Shelter inflation, which has been a persistent source of pressure, fell to its lowest annual pace since 2021, while durable goods prices continued to moderate despite potential tariff impacts.
Even though the data was encouraging, the response in bond markets was muted. This is likely because the November inflation report is just one of several indicators the U.S. Federal Reserve (Fed) will look at before making a decision on interest rates in January. By the time the central bank’s Jan. 27-28 meeting rolls around, the Fed will have seen two more months of inflation data in addition to reports on economic growth and the labor market.
In our view, the bigger U.S. macroeconomic picture remains intact, with a labor market that has cooled but not cracked yet. Heading into 2026, we anticipate strong growth and a continued easing in price pressures. Amid this backdrop, we expect the Fed to slow the pace of rate reductions in the year ahead. We think the central bank may only cut once in 2026, given that doing so would take rates close to 3.25%, which is our estimation of the neutral rate of interest.
Key central banks signal diverging paths
The encouraging inflation data extended beyond the United States, with the UK and Canada also seeing a slowdown in price pressures during November.
Despite this, markets think inflation could remain sticky in Canada and are pricing in one rate hike from the Bank of Canada (BoC) next year. We see such expectations as premature given Canada’s economy is still in a fragile state. We think the BoC will remain more focused on growth risks rather than inflation risks in 2026, making a rate hike unlikely in the year ahead.
Meanwhile, in the UK, the Bank of England (BoE) voted 5-4 on Thursday to cut rates by 25 basis points. Close decisions are not uncommon for the BoE, and we expect further gradual reductions through 2026 until borrowing costs reach about 3%, which we see as the neutral rate of interest.
The European Central Bank (ECB), in contrast, left rates unchanged. During the follow-up press conference, President Christine Lagarde was pressed on whether the ECB intends to raise rates in 2026, but she reiterated that policy will remain data-dependent, with no preset course.
A resilient year for markets
Despite the bouts of volatility—particularly the turbulence seen in April—2025 has been a strong year across major asset classes, ranging from equities to infrastructure. The breadth of this performance is a reminder of the value of staying invested, maintaining discipline, and focusing on the long-term during times of uncertainty.
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Editor’s note: Market Week in Review will not be published on Dec. 26 or Jan. 2 due to the year-end holidays. Publication will resume on Jan. 9, 2026.
© Russell Investments
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