Markets Yawn at a Mixed CPI

[Andrew Postell]

December’s CPI report delivered a mixed set of surprises relative to expectations: headline inflation rose 2.7% year‑over‑year, coming in slightly above the 2.6% economists had forecast, while the month‑over‑month increase of 0.3% matched consensus. Beneath the surface, core CPI increased 2.6% year‑over‑year, a touch cooler than the 2.7% expected, and the 0.2% monthly core gain undershot the 0.3% forecast, signaling softer underlying price pressures. Category‑level data showed shelter (+0.4%) and food (+0.7%) as key contributors to the monthly increase, while energy rose a modest 0.3%, broadly aligning with the headline figure. Overall, the report painted a picture of inflation that was slightly firmer at the headline level but clearly cooling in its core components, reinforcing the view that underlying price momentum continues to moderate heading into 2026.

From a policy‑expectations standpoint, the data did little to alter already‑evolving market narratives. JP Morgan strategists indicated they no longer expect any rate cuts in 2026 and now anticipate the next policy move could be a rate hike in 2027. Markets continue to digest last week’s labor data, which investors view as effectively locking in a January FOMC pause, regardless of any short‑term inflation surprises.

As the dust settles, markets are relatively quiet with MBS slightly lower on the day, pulling back from last week’s Trump announcement ripfest. Treasury yields are a little higher, but yesterday’s “sell America” theme continues to drive stocks lower; the DOW is currently down 321 points.

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