The next major test for financial markets arrives Monday morning when the Bureau of Labor Statistics releases December's Consumer Price Index at 8:30 a.m. Eastern time. After a volatile start to 2026 that saw stocks reach new records while bond yields surged, the inflation reading could set the tone for Federal Reserve policy and market direction through the first quarter.

The December data carries extra significance because October's CPI was never released due to the partial government shutdown that suspended federal statistical operations. November's report showed headline inflation at 2.7% year-over-year and core inflation at 2.6%, but questions lingered about data quality given the collection disruptions.

What Economists Expect

Wall Street consensus expects December headline CPI to come in around 2.8% year-over-year, a modest acceleration from November's 2.7% reading. Monthly headline inflation is projected at 0.3%, reflecting continued pressure from energy prices and seasonal factors.

Core CPI, which strips out volatile food and energy components, is expected to hold steady at 2.6% annually. The core reading is arguably more important for Fed policy since it provides a cleaner signal of underlying inflation trends. Any surprise to the upside would likely trigger immediate selling in bonds and could pressure stocks.

"December's CPI data will provide more insights into the inflation trajectory, and to policymaking."

- S&P Global Market Intelligence

Key Categories to Watch

Several line items within the CPI report warrant special attention. Shelter costs, which account for approximately one-third of the index, have been stubbornly elevated despite private-sector rent trackers showing meaningful deceleration. The lag between market rents and official CPI shelter data has been a persistent source of frustration for Fed officials hoping to declare victory over inflation.

Food prices, particularly eggs and poultry, remain volatile due to ongoing avian flu impacts on supply. November's data showed eggs down 13% year-over-year after earlier spikes, but meat prices remained elevated at 6.8% higher. Grocery inflation has moderated but remains a political and economic flashpoint for many households.

Energy prices will also draw scrutiny. Gasoline rose 3.0% in November on a monthly basis, and crude oil prices have rebounded from late-2025 lows amid Middle East tensions. December's reading will indicate whether energy is adding to or subtracting from headline inflation pressure.

Fed Policy Implications

The inflation data arrives at a pivotal moment for monetary policy. Bond traders have essentially eliminated bets on a January rate cut following last week's December jobs report, which showed the unemployment rate falling to 4.4% from 4.6%. The Fed's next interest rate decision is scheduled for January 29.

If December CPI comes in hotter than expected, it would reinforce the case for the Fed to remain on hold through the spring. Markets are currently pricing fewer than two quarter-point rate cuts for all of 2026, a dramatic shift from expectations of four or more cuts that prevailed as recently as late 2025.

The Inflation Trajectory Question

For the Fed, the question is not just where inflation stands today but where it's heading. Core inflation has been stuck in the 2.6% to 2.8% range for months, failing to make meaningful progress toward the 2% target. Chair Jerome Powell and other officials have emphasized they need greater confidence that inflation is sustainably returning to target before cutting rates further.

A cooler-than-expected December reading could provide some of that confidence and potentially open the door to rate cuts later in the year. A hotter reading would do the opposite, potentially pushing the first cut into the second half of 2026 or even 2027.

Market Reaction Scenarios

Given how much is riding on the data, markets could move sharply in either direction depending on the outcome.

Bull Case: CPI at 2.6% or Below

If headline inflation comes in at 2.6% or lower with core holding steady, expect Treasury yields to fall, potentially dragging the 10-year yield back toward 4.0% from its current 4.2% level. Stocks would likely rally, particularly rate-sensitive sectors like real estate and utilities. The dollar could weaken as rate cut expectations rebuild.

Bear Case: CPI at 3.0% or Above

An upside surprise with headline inflation hitting 3.0% or higher would likely trigger a sharp selloff in Treasuries, pushing the 10-year yield toward 4.5%. Growth stocks would face pressure as higher rates erode the present value of future earnings. The dollar would strengthen against major currencies.

Base Case: In-Line at 2.8%

If the data matches consensus expectations, market reaction may be muted. The report would validate current Fed expectations without providing new information to shift positioning. Stocks could drift higher on relief that the number wasn't worse.

Beyond the Headline

Sophisticated investors will look beyond the top-line numbers to understand the composition of inflation. Services inflation excluding shelter has been particularly sticky and is a key focus for Fed officials. Goods inflation has moderated significantly as supply chains normalized, but services reflect domestic labor costs that the Fed influences more directly through monetary policy.

The data will also arrive just before the January JPMorgan Healthcare Conference, which traditionally kicks off fourth-quarter earnings season. Strong inflation data could cast a shadow over corporate guidance as companies assess cost pressures heading into 2026.

The Bottom Line

Monday's December CPI report represents the first major economic data point of 2026 and could significantly influence Fed policy and market direction for weeks to come. With rate cut expectations already diminished and Treasury yields elevated, the bar for a dovish surprise is low. But an upside shock could further tighten financial conditions and pressure risk assets. Investors should be prepared for volatility regardless of the outcome.