CPI Comes in Cooler — But the Fed Still Isn’t Cutting Anytime Soon

US inflation offered a modest upside surprise in December, but not the kind that resets the story. Headline CPI was exactly in line with expectations while core inflation came in a touch cooler, briefly sparking a risk-on pop in equity futures before the market quickly faded back toward flat-to-lower levels. The initial reaction made sense: a softer core print is the closest thing markets get to a “clean win” for the Federal Reserve. But the fade was just as telling—investors are increasingly viewing incremental improvements as confirmation that inflation is cooling , not proof that the Fed is suddenly free to cut. The narrative remains intact: disinflation is happening, but the last mile is still stubborn, and rate cuts are still priced as a mid-year 2026 event rather than an imminent policy pivot.

The details of the report underline why the market didn’t chase the move. The CPI rose 0.3% month-over-month in December, pushing the year-over-year headline rate to 2.7%, unchanged from November. Core CPI (excluding food and energy) rose 0.2% on the month and slowed to 2.6% year-over-year. That’s a constructive direction of travel, and it gives policymakers a little breathing room after months where services inflation and housing-related components refused to cooperate. In the immediate post-release tape, softer core inflation helped push Treasury yields lower and weakened the dollar, but those moves moderated as investors stepped back and re-ran the same math they’ve been using for months: “better” does not equal “done.”

Shelter was once again the main reason inflation still feels sticky. The shelter index rose 0.4% in December and was the largest contributor to the monthly increase in headline CPI. Owners’ equivalent rent rose 0.3%, as did rent of primary residence, while lodging away from home jumped 2.9%. On a year-over-year basis, shelter inflation was up 3.2%, and because shelter accounts for more than a third of CPI’s weighting, it remains the gravitational force keeping the overall index from falling more quickly toward the Fed’s 2% target. If you’re looking for the “last mile” problem, it’s here: shelter is decelerating, but it’s doing so slowly and inconsistently, and the monthly prints remain hot enough to keep the Fed cautious.

The report also showed a familiar split between goods and services, with several categories hinting at goods disinflation returning even as services remain firmer. The indexes that increased in December included recreation, airline fares, medical care, apparel, personal care, and education, while communication, used cars and trucks, and household furnishings and operations were among the larger decliners. Used cars and trucks fell 1.1% on the month and communication fell 1.9%, reflecting the continued normalization in certain goods categories after years of supply-chain whiplash. New vehicles were unchanged. This is the part of the report the Fed likes: areas where inflation pressure is fading without requiring a hard economic landing. But the services side—especially shelter—keeps reasserting itself as a persistent source of price pressure.

Food inflation stood out as one of the hotter components in the month. The food index rose 0.7% in December, with food at home and food away from home both up 0.7%. Full service meals climbed 0.8% while limited service meals rose 0.6%, reinforcing that restaurant inflation remains a steady grind. Within groceries, “other food at home” jumped 1.6%, dairy rose 0.9%, cereals and bakery increased 0.6%, and fruits and vegetables rose 0.5%. Eggs were a major offset, falling 8.2% in the month. Over the past year, food inflation rose 3.1%, while food away from home rose 4.1%—a reminder that “inflation cooling” often feels different to consumers than it does to economists, because everyday staples and services still carry elevated price momentum.

Energy inflation was firmer in the month, but it remains choppy and more market-driven than structural. The energy index rose 0.3% in December, with gasoline down 0.5% but natural gas up 4.4% and electricity down slightly. On a year-over-year basis, energy prices rose 2.3%, while gasoline was down 3.4%. Energy remains less about CPI mechanics and more about geopolitics and commodity swings, and that’s especially relevant now given the market’s renewed sensitivity to tariff headlines and potential disruptions in global supply routes.

That brings us to the tariff question—which is increasingly becoming the market’s “next chapter” inflation debate. Portions of the report hinted at movement in categories that investors often frame as tariff-sensitive, like apparel (up 0.6% in December). At the same time, some import-heavy goods categories such as household furnishings and operations declined 0.5% on the month, suggesting that broad tariff pass-through is still uneven. The market’s current view appears to be that tariff-driven price increases have been “mostly passed through” so far, but investors remain on guard for a secondary wave of price hikes in early 2026 as companies adjust pricing strategies and supply chains. Even if tariffs don’t reignite runaway inflation, they raise the risk that inflation remains “stuck” above target for longer—exactly the scenario where the Fed stays on hold and the market’s rate-cut timetable keeps sliding right.

The Fed implications were positive, but incremental. A slightly cooler core print is helpful confirmation that inflation is trending in the right direction, but the Fed doesn’t need one good report—it needs a sustained series of them, and it needs shelter to cooperate. That’s why market expectations remain anchored around the first rate cut of 2026 arriving in June, rather than in the first half of the year. In this cycle, the Fed has consistently signaled it would rather be late than wrong, and sticky shelter inflation gives them plenty of justification to wait.

One extra wrinkle lurking in expectations is that June would also be the first meeting without Jerome Powell (as you noted), which adds a political and leadership transition element to the rate-cut narrative. Markets tend to like continuity, but they like predictability even more—and right now the most predictable path is “hold steady, watch shelter, reassess mid-year.” That’s not dramatic, but it’s consistent with how officials have communicated throughout the final stretch of disinflation.

The market reaction summed it up in real time. Futures popped on the softer core number, yields dipped, the dollar softened, and then the whole move started to unwind as traders realized the CPI didn’t meaningfully change the policy outlook. Inflation is cooling, yes—but it’s still elevated, shelter is still the main problem, and tariffs remain a potential accelerant that could keep price pressures sticky even as goods inflation behaves. In other words, the Fed got good news, but not freedom. And for markets, that means the burden of proof stays high: risk assets can rally on “less bad,” but they still need a real catalyst to trend higher—especially when “June cut” is still the base case and the last mile is still uphill.