Consumer prices rose 6.5% last month compared to a year ago, extending a monthslong slowdown of price hikes and bolstering hopes that the U.S. can avert a recession.
Year-over-year inflation has fallen for six consecutive months since it reached a peak of 9.1% in June. Despite the slowdown in price increases, inflation continues to hover near a 40-year high.
Economists had predicted a CPI increase of 6.7%.
Monthly inflation also dropped markedly. Prices fell 0.1% in December, cooling from a 0.1% increase in November.
The top contributor to the monthly decrease in prices came from gasoline, which fell 9.4% in December. By contrast, food prices jumped over the month, rising 0.3%.
Despite the overall slowdown of cost increases, the price of eggs continued to climb. The price of eggs rose 60% compared to a year ago, and on a monthly basis the price jumped 11%.
A bird flu outbreak has slashed the supply of eggs, exacerbating added costs for fuel and labor.
The Federal Reserve imposed a string of aggressive rate hikes last year that aim to slow price increases by cooling the economy and choking off demand. The approach, however, risks tipping the U.S. into a recession and putting millions out of work.
A further slowdown in price increases would allow the Federal Reserve to taper off interest rate hikes, positioning the U.S. economy to avoid a severe downturn, Dana Peterson, chief economist at The Conference Board, told ABC News.
"If inflation continues to slow and especially is slowing in areas that the Fed has the most control over, then that's a good thing," she said.
In early February, the Federal Reserve will decide whether to raise interest rates again and, if so, how much. At a meeting last month, the central bank raised its benchmark rate by 0.5%, softening its approach after a series of jumbo-sized 0.75% increases.
Still, Fed Chair Jerome Powell vowed to continue imposing rate hikes until inflation returns to the central bank's target level of 2%.
"Fifty basis points is still a historically large increase, and we still have some ways to go," Powell said last month. "We will stay the course until the job is done."
So far, the labor market has proven resilient, buoying the hopes of policymakers seeking to cool prices without causing significant job losses.
Hiring remained strong last month as employers added 233,000 jobs and wages grew a robust 4.6% compared to a year earlier.
While the wage gains offered welcome relief for workers strained by price hikes, they marked a slowdown from 5.1% annual growth recorded in November, reassuring some observers who fear that rising wages could push companies to hike prices and deepen inflation.
The labor market has struck a balance between strong hiring that keeps Americans employed and moderate wage growth that prevents runaway inflation, Iwan Barankay, a professor of business economics and public policy at University of Pennsylvania's Wharton School of Business, told ABC News.
"We still see healthy increases in hiring month to month. It's not too hot and not too cold," he said. "I really don't see any merit in scaremongering."
Despite the robust job market, growing evidence suggests the Fed's rate hikes have put the brakes on some economic activity.
Home sales fell for the 10th month in a row in November, the most recent month on record. Sales of existing homes, such as single-family homes and condominiums, were down about 35% from a year earlier.
Meanwhile, new orders for U.S.-manufactured goods fell more than expected in November, suggesting that consumer demand had slowed, according to Commerce Department data released last week.
Similarly, the country's factory activity shrank for a second consecutive month in December, according to an Institute for Supply Management survey.