December CPI: The Market's "Priced In" Inflation Checkpoint

The December CPI report delivered a classic expectations reset. The headline number came in exactly as forecast, with consumer prices rising 2.7% year-over-year. That precise match to the consensus suggests the market had already priced in a steady, albeit still elevated, inflation reading. The real story, however, was in the details-and the market's reaction to them.

The core CPI, which is the metric the Federal Reserve watches most closely, showed a more nuanced picture. It rose 2.6% annually and 0.2% monthly. That monthly gain undershot the 0.3% expectation. For a market that had been pricing in a slight acceleration in core inflation, this miss was the key divergence. It provided a tangible "beat" on the whisper number for disinflation, even if the headline was flat.

This is the setup for a "buy the rumor, sell the news" dynamic. Stock futures initially turned positive after the release, a clear signal that the data met the market's baseline expectations. The initial pop suggests the news was not bad-it was simply not better than what was already anticipated. The expectation gap was closed, and with it, the catalyst for a rally was removed. The market's subsequent choppiness likely reflects traders digesting the core inflation miss and its implications for the Fed's next move, but the initial reaction confirms the print was largely priced in.

Decoding the "In Line" Print: What the Numbers Actually Show

The headline CPI print was a mirror image of the market's expectations: flat. But the underlying drivers reveal a more complex story of persistent pressures and selective relief. For the "expectation arbitrageur," the key question is whether these details signal a meaningful shift or merely a continuation of the existing trend.

Shelter costs were the largest monthly driver, rising 0.4 percent. That's a notable gain, but it was smaller than the typical increases seen in recent years, acting as a partial brake on the overall index. More concerning were the pockets of intense pressure. Food-at-home prices jumped 0.7 percent on the month, marking the biggest gain since 2022. Recreation prices surged 1.2 percent to a record high, while home insurance costs rose 1 percent monthly and 8.2 percent over the past year. These categories highlight that inflation for staples and discretionary spending remains "uncomfortably high," as economist Mark Zandi noted.

At the same time, some categories provided clear relief that helped hold down core inflation. Auto prices were a key offset, with used-car prices dropping 1.1 percent and new vehicle prices flat. Household furnishings also declined, further moderating the core reading. This mix of pressures and offsets is the reality beneath the "in line" headline. It shows inflation is not a monolithic force but a collection of divergent trends.

The bottom line is that the December print represents a continuation of the trend, not a reversal. The data confirms that disinflation is a slow, uneven process. While the core CPI monthly gain undershot expectations, the surge in food and recreation prices, coupled with sticky shelter and insurance costs, suggests the Fed's work is far from done. The market's initial positive reaction to the headline was a classic "buy the rumor" move, but the detailed print shows the underlying reality is more nuanced than the whisper number suggested.

The Fed's Next Move and Market Implications

The December CPI report adds a clear data point to the narrative that inflation is trending down, but it also reinforces the Fed's cautious stance. Economists see the data as supporting the slow disinflation trend, with Preston Caldwell of Morningstar noting it adds further support to the notion that inflation is trending down. Yet, the report's clarity after data disruptions from the government shutdown may not be enough to prompt a policy shift. Vanguard's Josh Hirt expects the Fed won't have enough evidence to cut rates at its meeting at the end of the month, citing lingering data distortions and a mixed jobs report. The bottom line is that the Fed is likely to wait for clearer, more sustained evidence before acting.

This sets up a "higher for longer" rate environment that the market is already pricing in. Analysts overwhelmingly expect the Fed to keep interest rates as-is at its meeting at the end of the month. The unchanged headline and core CPI numbers, while meeting consensus, do not provide the decisive downward momentum needed to justify a pause in the Fed's current policy. The market's initial positive reaction to the headline was a "buy the rumor" move, but the detailed print shows the underlying reality is more nuanced than the whisper number suggested.

The report's main impact may be to reduce near-term Fed uncertainty, providing a clearer picture after the data gaps from the shutdown. However, elevated core inflation in categories like food and recreation remains a key watchpoint. The record-high recreation prices and the surge in food-at-home costs highlight that inflation for staples and discretionary spending remains "uncomfortably high." These pockets of pressure, even amid a softer overall print, will keep the Fed on the sidelines. For asset prices, this means the catalyst for a rate-cut rally is delayed, keeping Treasury yields elevated and supporting a cautious stance on risk assets until the disinflation trend becomes more durable.

Catalysts and Risks: What to Watch Next

The market has digested the December CPI print, which met expectations and closed the immediate gap. Now, the focus shifts to the next data points that will test whether the slow disinflation trend is gaining traction or merely holding steady. The coming weeks will provide the real catalysts for reassessing the rate outlook.

The first major test arrives on February 11, 2026, with the release of January CPI data. This report will show if the soft December core reading was a sustainable dip or a temporary pause. Traders will be watching for any acceleration in the core index, particularly in categories that have shown persistent pressure. The report will also be the first full monthly data point since the government shutdown, offering a clearer picture of underlying trends without the distortions that clouded the December print.

More immediately, the Federal Reserve's meeting in late January will be the key catalyst for reassessing the rate outlook. While analysts expect the Fed to keep rates unchanged, the meeting will be a critical checkpoint. The central bank will weigh the latest inflation data against labor market conditions and its long-term inflation target. Any shift in the Fed's forward guidance-whether a more hawkish tone due to sticky shelter costs or a dovish tilt if core inflation shows firmer cooling-will have an outsized impact on market expectations.

The primary risk to the disinflation thesis lies in specific categories that could reset expectations. Watch for any acceleration in shelter and food inflation. Shelter costs, driven by a low supply of homes and slow price adjustments, remain a dominant force. A rebound in rent growth or home prices could quickly undermine the softening trend. Similarly, the record-high recreation prices and the surge in food-at-home costs highlight that inflation for staples and discretionary spending remains "uncomfortably high." If these pockets of pressure widen or persist, they could force the Fed to maintain a higher-for-longer stance, pressuring risk assets and keeping Treasury yields elevated.

The bottom line is that the market's current calm is fragile. The expectation gap for the December report was closed, but the path forward depends on the next set of data. The February CPI and the late-January Fed meeting will determine whether the "slow and steady" disinflation narrative holds or if new headwinds emerge to reset expectations.