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            On the Minds of Investors

            Did the December CPI report change the outlook for Fed policy?

            BH
            Brandon Hall

            Research Analyst

            Published: 01/14/2026
            Even with the slightly softer print, a full 25 bps cut isn’t priced in until July, versus June after the December jobs report.

            The December CPI report showed that inflation rose largely in line with expectations, although the reversal of shutdown-driven data quirks that biased inflation lower last month was milder than expected. Still, we expect the Federal Reserve will remain on pause through early 2026 to assess the impacts of government policy on labor market and inflation dynamics.

            In the details…

            • Headline inflation holds steady while core decelerates: Headline CPI inflation rose 0.3% m/m and 2.7% y/y, matching consensus expectations and last month’s annual increase. Food prices rose by 0.7% m/m, marking the fastest gain since 2022. Energy prices rose by a more tepid 0.3% m/m as declines in gasoline and fuel oil were offset by a 4.4% m/m rise in utility gas service prices. Excluding food and energy, inflation rose by a slightly softer than expected 0.2% m/m and 2.6% y/y.
            • Weakness in autos weighs on core goods: Core goods prices were flat in December, resulting in an annual increase of 1.4%. Autos, a segment unaffected by the government shutdown, looked soft with new and used vehicles flat and down 1.1%, respectively. Elsewhere, apparel prices rose 0.6% m/m, potentially reflecting some reversion of the artificially low prints caused by the government shutdown. In aggregate, however, the bounce back from the statistical quirks was more muted than expected. Even excluding autos, core goods prices rose a modest 0.2% m/m.
            • Lodging and airfares lift core services: Core services prices rose 0.3% m/m and 3.0% y/y, holding steady from November. Shelter prices were up 0.4% on the month, driven by a 2.9% increase in lodging away from home, its fastest increase since 2023. Rent and owners’ equivalent rent, categories that will remain distorted until the sample panel resets in April 2026, both rose 0.3% m/m, consistent with their pre-shutdown pace. Transportation services rose by 0.5% on the back of a 5.2% spike in airfares.

            When all is said and done, this report does little to change the outlook for monetary policy. Even with the slightly softer print, a full 25 bps cut isn’t priced in until July, versus June after the December jobs report. Why? For starters, it is unclear how lingering effects of the government shutdown have affected the quality of the data. Moreover, fiscal stimulus and delayed tariff pass‑through could cause inflation to reaccelerate in 1H26. For these reasons, inflation and jobs reports in the months ahead will be far more consequential for monetary policy.

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            • Federal Reserve
            • Inflation
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