The consumer price index, or CPI, increased 6.5 per cent year-on-year last month, down from 7.1 per cent the month prior, the US Bureau of Labour Statistics said on Thursday.
It was the smallest 12-month gain since October 2021.
On a monthly basis, the CPI decreased by 0.1 per cent in December.
“Even though inflation is high … it is coming down in America month after month,” President Joe Biden said in remarks from the White House.
The core CPI, which excludes the volatile food and energy markets, was up by 5.7 per cent over the past 12 months.
The moderation in prices was largely driven by declining fuel costs, with the energy index decreasing by 4.5 per cent. Average petrol costs in the US have fallen to $3.27 a gallon since hitting $5 in June, according to AAA.
Costs for used cards and airline fares also decreased last month.
Thursday's report shows that inflation is slowing after peaking at 9.1 per cent last summer, giving room for the Fed to reduce its interest rate increases in a bid to rein in the high cost of goods.
CME's FedWatch tool expects the central bank to raise interest rates by 25 basis points when it next meets, after a year in which it raised the federal funds rate to the range of 4.25 to 4.50 per cent.
The minutes released from the central bank's meeting in December showed officials were not willing to reduce the federal funds rate this year in a quest to bring inflation back down to its long-term goal of 2 per cent.
At the same time, the Fed has said it would be flexible in possibly scaling back the scale of interest rate increases.
Fed chairman Jerome Powell said the central bank expected the federal funds rate to reach 5.1 per cent by the end of the year.
Meanwhile, a separate Labour Department report showed applications for unemployment benefits fell to their lowest level in 15 weeks, a sign of a resilient labour market despite the Fed's interest rates.
Jobless aid applications fell from 206,000 to 205,000 this week.
Mr Powell has repeatedly indicated that the labour market remains too tight, a contributing factor to inflation.
A report last week showed that employers added 223,000 jobs last month as the unemployment rate dipped to 3.5 per cent, a 53-year low.
Policymakers forecast unemployment in the US will jump to 4.6 per cent this year, according to a summary of their economic projections.
Mr Powell previously said the economy must continue to show signs that it is slowing if inflation is to climb back down to the Fed's 2 per cent objective.
Thursday's report is the last the Fed will receive before it issues its next interest rate decision at the end of the month.