How the November CPI Report Could Shape Market Sentiment and Fed Policy in 2026

The release of the November 2025 U.S. Consumer Price Index (CPI) report on December 18, 2025, has become a focal point for investors and policymakers alike. With inflation remaining stubbornly above the Federal Reserve's 2.0% target, the report's findings will likely influence expectations for monetary policy in 2026. However, the data's reliability is clouded by operational challenges, including a government shutdown that disrupted data collection and omitted October's CPI results. This uncertainty complicates efforts to assess inflation stickiness and its implications for rate-cut expectations.

Assessing Inflation Stickiness

The November CPI report is expected to show an annual inflation rate of 3.1%, up from 3.0% in September, with core inflation similarly rising to 3.1%. This persistence is driven by a mix of energy, food, and services sector pressures.

Energy and Food Prices: Gasoline prices surged 4.1% in September 2025, while electricity prices, though down 0.5% month-over-month, remain 5.1% higher year-over-year. Food prices, particularly for meats and poultry, have been elevated by supply chain disruptions and the avian flu, with the food-at-home index rising 0.3% in September. Analysts project a 3.0% annual increase in food prices for 2025, underscoring the sector's role in inflation stickiness.

Services Sector Pressures: Shelter costs, including owner's equivalent rent (OER) and rent, continue to rise, albeit at a slower pace. The OER index increased 0.1% in September, while medical care services rose 0.3% monthly and 3.9% annually. Car insurance costs, driven by higher repair expenses and climate-related damages, are also contributing to inflation according to CEPR analysis. These services components, which account for over half of the CPI basket, highlight the challenge of disinflation in labor-intensive sectors.

Implications for Fed Policy

The Federal Reserve's ability to cut interest rates in 2026 hinges on whether inflation shows signs of moderating. However, the November report's limitations-such as the absence of October data and potential biases from the Thanksgiving holiday-make it difficult to draw clear conclusions.

Tariff-Driven Inflation: President Donald Trump's tariffs on vehicles and apparel have added upward pressure to prices, though these categories have limited weight in the CPI according to Morningstar analysis. Goldman Sachs economists note that the lack of October data obscures the true volatility in November's numbers, complicating the Fed's assessment of inflation trends.

Policy Dilemmas: A 3.1% annual inflation rate would represent the highest level since May 2024 and could delay rate cuts. UBS economists caution that the November report may not fully capture inflation dynamics, suggesting that December's data will provide a clearer picture according to Morningstar reports. If inflation remains sticky, the Fed may prioritize price stability over growth, potentially extending the current high-rate environment.

Market Sentiment and Investment Strategies

Investors are already pricing in the possibility of delayed rate cuts. The S&P 500's performance in late 2025 reflects optimism about a "soft landing," but a hotter-than-expected CPI report could trigger a reevaluation.

Equity Markets: Sectors sensitive to interest rates, such as real estate and utilities, may face headwinds if the Fed signals a hawkish stance. Conversely, defensive sectors like healthcare could benefit from sustained inflation, given their exposure to services inflation.

Fixed Income and Commodities: Treasury yields may rise in response to a 3.1% CPI reading, as investors demand higher returns for inflation risk. Meanwhile, energy and agricultural commodities could remain volatile, reflecting ongoing supply-side challenges.

Conclusion

The November 2025 CPI report, while imperfect, underscores the persistence of inflation in key sectors. While some economists anticipate moderation in 2026 due to falling gasoline prices and easing housing costs, the stickiness of services inflation and tariff-driven pressures complicates this outlook. Investors should brace for a prolonged period of uncertainty, with policy decisions hinging on the reliability of future data. As the Fed navigates this complex landscape, a cautious approach to rate-cut expectations appears prudent.