US CPI December Preview: Markets React Ahead of Inflation Report

What to Know

• The US Consumer Price Index (CPI) for December is expected to show steady inflation at 2.7% year-on-year.
• Core inflation, excluding food and energy, is projected to remain sticky above the Fed’s 2% target.
• The Fed is unlikely to adjust interest rates at the next meeting unless there’s a significant surprise in the CPI data.
• Headline and core monthly CPI increases are forecast at 0.3%, indicating gradual disinflation rather than a sharp decline.
• Investors are focusing on broader US labor market health and economic growth when assessing Fed policy.

US CPI Preview: December Inflation Expected to Remain Steady

The US Bureau of Labor Statistics (BLS) is set to release December’s Consumer Price Index report on Tuesday at 13:30 GMT. Market participants will scrutinize the figures closely, as CPI remains a key gauge of inflation and a driver for short-term US Dollar (USD) movements.

Headline CPI is projected to rise 2.7% year-on-year, unchanged from November. Meanwhile, core CPI—which excludes the more volatile food and energy components—is expected to edge up slightly from 2.6% to 2.7%. This suggests that while inflation pressures are easing slowly, they remain stubbornly above the Federal Reserve’s 2% target.

On a monthly basis, both headline and core CPI are forecast at 0.3%, reinforcing the notion that inflation is slowing gradually rather than sharply. This slow disinflation pattern underlines why the Fed has taken a cautious stance and why immediate rate cuts are not widely expected.

Fed Rate Outlook: Policy Likely to Stay on Hold

With core inflation above target, the Federal Reserve is likely to maintain its current monetary policy stance during the next meeting. Policymakers are focused primarily on the labor market, making it unlikely that CPI alone will trigger an adjustment.

Recent minutes from the December 30 Fed meeting revealed a divided Committee, with several officials favoring a wait-and-see approach. This highlights that the decision to cut or hold rates remains finely balanced, and even a small surprise in inflation data could influence market expectations.

Analysts at TD Securities anticipate that core CPI will peak around 3% in the second quarter of 2026, with gradual disinflation expected in the second half of the year. They forecast the year-end core CPI at 2.6%, indicating that the Fed’s cautious approach is likely to continue.

Impact on Currency Markets: EUR/USD in Focus

The December CPI report could influence forex markets, particularly the EUR/USD pair. Investors are weighing mixed signals from the December Nonfarm Payrolls (NFP) data, but the labor market remains the Fed’s primary focus.

Given the steady inflation outlook, analysts do not expect a dramatic shift in US monetary policy. As a result, EUR/USD movements may be muted unless the CPI data surprises significantly. Traders will be looking at the numbers in combination with upcoming economic reports to gauge the Fed’s policy trajectory and potential effects on the dollar.

Broader Market Implications

Even with steady inflation, the market remains attentive to other potential risks, including threats to Fed independence and broader geopolitical or economic developments. Investors and traders should consider CPI in the context of:

• Labor market health
• Fed policy signals
• Economic growth trends
• Market sentiment and risk appetite

This holistic view ensures that decisions are based on the overall economic environment, not just a single data point.

Key Takeaways from December CPI

• Headline CPI expected at 2.7% YoY; core CPI at 2.7%
• Monthly increases steady at 0.3%
• Fed likely to hold interest rates unless a major inflation surprise occurs
• Markets focus on labor market, growth, and Fed signals for policy direction
• EUR/USD may see moderate volatility depending on CPI surprises

Q&A: US CPI and Market Implications

What is the US CPI report?

The Consumer Price Index (CPI) measures the average change over time in the prices paid by urban consumers for a basket of goods and services. It is a key gauge of inflation and influences monetary policy decisions.

How does CPI affect the US Dollar?

Higher-than-expected CPI often strengthens the US Dollar as it raises expectations of tighter monetary policy. Conversely, lower inflation can weaken the dollar by suggesting a more dovish stance from the Fed.

Will the Fed cut rates after the December CPI report?

Currently, the Fed is not expected to cut rates unless the CPI shows a major deviation from expectations. Policymakers are more focused on labor market conditions and overall economic growth.

How can traders use CPI data?

Traders monitor CPI to anticipate interest rate decisions, adjust forex positions, and manage risk in equities and fixed-income markets. Volatility around the CPI release can create short-term trading opportunities.

Read more: Understanding Fed Rate Cuts: Impact on Crypto, Stocks, and the Economy