Investors also homed in on figures from the Bureau of Labor Statistics indicated headline annual inflation rose in line with expectations to 2.9% in December from 2.7% in November.
But core inflation, which strips out volatile food and energy costs, fell unexpectedly to 3.2% from 3.3% a month before.
Markets had dipped in recent weeks as investors scaled back expectations of Federal Reserve rate cuts in anticipation of president-elect Trump’s economic policy, which some fear will be inflationary.
“Today’s CPI should provide a boost to markets, relieving some of the anxiety that the US is at the beginning stages of a second inflation wave,” said Seema Shah, chief global strategist at Principal Asset Management.
The policy-sensitive two-year Treasury yield, which closely tracks interest rate expectations, dropped 0.1 percentage point to trade at 4.27%.
The 10-year yield, a benchmark for global borrowing costs, tumbled 0.14 percentage points to 4.65%. Yields fall as prices rise.
A gauge of the dollar against six peers fell 0.2%.
Investors were betting the Fed would deliver its first quarter-point rate cut this year in July, compared with September before the data was published.
Fed officials have signalled they plan to take a “careful approach” to rate cuts amid concerns inflation may not quickly come down to the central bank’s 2% target.
Mark Cabana, head of US rates strategy at Bank of America, said the inflation figures, notably the core figure, were likely to “modestly increase” the Fed’s “confidence that inflation will continue to fall”.
But he added that policymakers were probably “still overall frustrated with the slowdown in the pace of progress on the inflation front”.
Most investors and analysts believe the Fed will not lower rates again at its next policy meeting later this month.
US central bankers have signalled in their own projections they will only cut rates by a further 50 basis points this year.
Trump, who takes office on Monday, has laid out aggressive plans to impose tariffs on a vast swath of imports, implement a huge crackdown on undocumented immigrants and enact sweeping tax cuts.
Economists have warned such plans could boost inflation further.
“The real question mark around inflation this year isn’t around what the economy can do to inflation or what the trend is before the Trump administration takes over,” said David Kelly, chief global strategist at JPMorgan Asset Management.
“It’s what will new policies on tariffs, immigration and fiscal policies mean for inflation?”
Written by: Harriet Clarfelt in New York and James Politi in Washington
© Financial Times
