December CPI Preview: Inflation Data Could Complicate Fed Outlook
Core CPI expected at 2.7% year-over-year when the Bureau of Labor Statistics reports Tuesday, slightly higher than November's reading.
The December inflation report drops Tuesday morning, and the stakes are higher than usual.
The Bureau of Labor Statistics releases the Consumer Price Index at 8:30 a.m. ET on January 13. Economists expect core CPI—which strips out volatile food and energy—to come in at 2.7% year-over-year. That's a tick higher than November's 2.6% reading, which was the lowest since early 2021.
Markets are watching closely because the Fed is watching closely. Any upside surprise complicates the already tenuous case for additional rate cuts this year.
What the Street Expects
The headline number matters less than core. Food and energy prices bounce around monthly, so the Fed focuses on the underlying trend.
| Measure | Expected | November |
|---|---|---|
| Core CPI YoY | 2.7% | 2.6% |
| Headline CPI YoY | 2.9% | 2.7% |
| Core CPI MoM | 0.2% | 0.2% |
A 2.7% core reading would end a stretch of improving prints. Inflation had been trending down steadily since mid-2025, giving the Fed cover for its 175 basis points in rate cuts. A reversal—even a modest one—changes the conversation.
Bloomberg economists note that December data was partially affected by the government shutdown earlier in the fall, which disrupted price collection in October. That makes seasonal adjustments trickier than normal, adding uncertainty to the read.
Why This Print Matters More Than Most
Fed officials have made clear they want to see inflation continue declining before cutting rates further. The December meeting dot plot suggested just one additional cut in 2026, and Minneapolis Fed President Neel Kashkari said last week the central bank is "pretty close to neutral".
A 2.7% print would reinforce that caution. It's not a disaster—it's still historically low—but it's not the steady march toward 2% that the doves need to justify further easing.
Market pricing reflects this uncertainty. Fed funds futures show a 97% probability of no change at the January 27-28 FOMC meeting. The first cut isn't fully priced in until April, with traders split on whether a second comes by September.
The CPI report can shift those odds quickly. A cool 2.5% reading would boost cut expectations. A hot 2.9% reading would push them out further.
Components to Watch
Shelter costs remain the stubborn culprit. Rent and owners' equivalent rent have been slow to decline even as real-world lease data shows softer pricing. The BLS methodology captures rents with a lag of several months.
The good news: shelter inflation should continue moderating through the first half of 2026 as those lags work through the data. Private measures from Zillow and Apartment List show rents flat to down in many markets.
Used car prices are another wild card. After deflating through much of 2025, wholesale auction data suggests prices firmed in December. A surprise increase would add to the core reading.
Services ex-shelter—the so-called "supercore" measure—offers the cleanest read on underlying inflation momentum. The Fed has emphasized this component in recent communications.
What It Means for Markets
Stocks have shown resilience to moderately elevated inflation. The S&P 500 posted record highs Friday and has risen 18.8% over the past year despite rates staying higher for longer than many expected.
The issue is the second derivative. Markets can handle 2.7% inflation if it's heading toward 2.5%. They struggle if 2.7% looks like a floor rather than a waypoint.
Treasury yields will react immediately at 8:30 a.m. A hot print sends the 10-year higher (bad for rate-sensitive stocks). A cool print provides relief and could send yields back toward 4.5%.
This report also lands alongside bank earnings—JPMorgan, Wells Fargo, Bank of America, and Citigroup all report Tuesday. The combination creates a gauntlet where multiple headlines compete for attention.
The sequencing matters. CPI hits at 8:30 a.m., bank earnings start dropping around the same time, and markets open at 9:30. It'll be a busy morning.