Core CPI Undershoots Forecasts in December, Easing Pressure on the Fed

The core consumer price index (CPI) for December 2025 came in below forecasts, marking a slight easing in inflationary pressures. Economists had expected core CPI to rise 0.26% for the month and 2.6% on a year-over-year basis, but the actual readings fell short of those expectations. This result is being seen as a sign that the Federal Reserve may not feel immediate pressure to cut interest rates.

The government shutdown earlier in 2025 significantly disrupted data collection for CPI, particularly for October and November. To address the lack of data, the Bureau of Labor Statistics used a carry-forward method, assuming prices remained unchanged during the shutdown period. This method has introduced potential biases into the readings and raises questions about the accuracy of the data.

Market analysts and policy observers are now closely watching the implications of the December CPI data. While the figures may suggest a cooling in inflation, the distortions caused by the shutdown complicate the interpretation of the numbers. Some experts argue that further data collection is needed to confirm trends before making policy decisions.

Why Did This Happen?

The government shutdown affected the Bureau of Labor Statistics' ability to collect timely and accurate pricing data. During the shutdown, staff could not conduct regular price surveys, and in some cases, data was assumed to remain unchanged from the prior month. This methodology has led to underestimations in periods of rising prices and overestimations during times of falling prices.

The use of carry-forward data also impacted key categories such as housing and services. For example, rent and owner's equivalent rent (OER) were assumed to remain flat for several months, distorting the inflation picture. The effect of this distortion is expected to continue into early 2026, with the data becoming more accurate only after April.

How Did Markets React?

Markets have reacted cautiously to the December CPI data. The initial report indicated a modest inflation rate, which has reinforced expectations that the Federal Reserve will maintain interest rates for now. Traders are now pricing in a reduced likelihood of aggressive rate cuts in the near term.

The S&P 500 and Nasdaq have both reached record highs recently, partly driven by the easing inflation data. The Dow Jones Industrial Average has also shown strength, reaching a new milestone as investors await further economic reports.

Investor sentiment has also been influenced by broader economic resilience, with global PMI data remaining in expansionary territory. However, concerns remain about geopolitical risks, including tensions involving Greenland and potential impacts on trade.

What Are Analysts Watching Next?

Analysts are now focusing on how the distorted data will evolve over the coming months. The expectation is that April 2026 will provide a more accurate picture of inflation after the impact of the shutdown is fully resolved.

In the meantime, attention is also shifting to other economic indicators. For example, Egypt's inflation rate has remained steady at 12.3%, offering potential room for further interest rate cuts in the region. The central bank has indicated a cautious approach, with no new fuel price hikes planned until October.

In the U.S., the upcoming release of January employment data and the next Fed meeting on January 26 and 27 will be key events for the market. The Fed is expected to maintain a data-dependent approach, with policymakers divided over the need for immediate action.

Global markets will also be watching the release of Chinese trade and retail sales data in the coming weeks. Strong performance from China could provide further support for commodities and the Antipodean currencies like the Australian dollar and New Zealand dollar.