The inflation report card is in

Our seemingly endless marathon toward 2% inflation still isn’t finished—but perhaps we’ve rounded the final corner.

Today, the Consumer Price Index rose 2.7% annually in December, unchanged from November’s reading, while it rose 0.3% on a monthly basis, which was lower than expected. Core CPI, which excludes volatile food and energy prices and is the Fed’s preferred gauge, jumped 2.6% annually—the best reading in four years—and rose 0.2% since November.

December’s CPI report was a welcome surprise after the Fed didn’t release the October inflation report card due to the government shutdown, and some Fed officials cast doubt on the delayed November report, saying that it likely downplayed how bad inflation actually was.

“After last month’s dubious calculations, especially on housing, this latest report is overall an encouraging one for investors,” explained Chief Economist for LPL Financial Jeffrey Roach.

The devil is in the details: While the headline numbers got an A, beneath the surface, some costs are skyrocketing, which explains why consumers aren’t feeling the relief yet. Food prices, which have become a key pillar in the political debates about affordability, surged: Grocery prices jumped 0.7% in December, the category’s biggest monthly gain since August 2022.

Piecing together expectations

Today’s report is only the second inflation reading since the Federal Reserve slashed interest rates three times last year. With inflation numbers and last week’s jobs report safely in hand, central bankers are trying to parse which should be addressed first: a slowing labor market or sticky inflation.

“Looking beyond near-term noise, we continue to expect inflation to moderate in 2026 as price pressures gradually ease,” explained Chief Investment and Portfolio Strategist, Americas, at BlackRock Gargi Chaudhuri. “From a policy perspective, we expect the Federal Reserve to hold rates steady at the January FOMC meeting (Jan. 27-28), following three consecutive rate cuts in 2025, as policymakers take time to assess the impact of past easing.”

Right now, traders seem to agree: They are pricing in just a 2.8% chance of a rate cut this month

Keep in mind: While central bankers are still piecing together the macro data puzzle, the unprecedented political drama over the Fed’s policy will only heat up the closer we get to the FOMC meeting.

There’s truly never a dull moment when it comes to the Federal Reserve.—LB