As the distorting effects of the US government shutdown on data collection gradually dissipate, the trajectory of US inflation towards the end of 2025 is expected to show resilience, a change that may signal a temporary end to the prior trend of slowing price growth. Market consensus anticipates that the core CPI data to be released tonight will show a rebound, indicating that underlying price pressures persist.
The US Bureau of Labor Statistics will release the December Consumer Price Index (CPI) at 8:30 AM ET on Tuesday (9:30 PM Beijing time). According to a Bloomberg survey of economists, both the headline CPI and the core CPI, which excludes food and energy costs, are forecast to rise 2.7% year-over-year. If this prediction holds, the headline CPI would be unchanged from November, while the core CPI would see a slight acceleration from the previous 2.6%.
The stickiness of inflation data provides support for the Federal Reserve to keep interest rates unchanged in the near term. Current pricing in interest rate futures markets indicates that investors do not expect a rate cut at the Fed's January 27-28 policy meeting, with the implied probability of a March cut also standing at only around 25%. Previous data showed that despite the Fed's three rate cuts in 2025 to support the job market, policymakers are facing a more complex situation before their inflation target is achieved.
Analysts point out that the unexpected weakness in November's inflation data was largely influenced by technical factors, and the December data will reflect the true price level once these disruptions are eliminated. Earlier data collection delays and statistical window shifts caused by the government shutdown may have masked some of the genuine inflationary pressures.
With the shutdown distortions fading, monthly data may strengthen. The key focus for the December CPI data lies in the recovery of the month-over-month growth rate. Consensus estimates from Bloomberg and FactSet surveys anticipate both the headline and core inflation indices to rise 0.3% month-over-month, higher than November's 0.2%. However, economists from institutions including Goldman Sachs and Bank of America believe the monthly performance of core inflation could be even stronger, potentially reaching 0.4%.
Morgan Stanley expects a significant rebound in US core CPI for December, forecasting a 0.36% month-over-month increase, far above the 0.08% average for October-November.
This potential strengthening primarily stems from the reversal of the "shutdown effect." The government shutdown hindered the Bureau of Labor Statistics from collecting complete data in October, making monthly comparisons difficult for November. Furthermore, the delayed data collection window meant November's data captured more discount prices during the holiday sales period and was widely considered to have underestimated housing inflation. Morgan Stanley stated that the December CPI data will reflect two major statistical biases caused by the government shutdown:
Bimonthly Sampling Bias: For certain goods and services outside the three major cities of Chicago, Los Angeles, and New York, prices are collected on a bimonthly basis. Due to missing October data, the BLS carried forward August prices to October, effectively assuming zero inflation for these cities in October. December will involve a fresh survey of these cities, leading to a lower base for price comparison. Morgan Stanley estimates that CPI categories significantly affected by bimonthly sampling averaged only a 0.10% month-over-month increase in October-November, while the underlying trend was 0.23%. By comparing data from the three major cities with the overall figures, the firm expects bimonthly sampling to contribute approximately 8 basis points of upward bias to the December core CPI. Holiday Discount Bias: The delayed price collection in November until the month-end implicitly over-weighted holiday promotional discounts, artificially depressing core goods (ex-autos) prices. This bias has existed historically but was amplified this year by the survey delay. Morgan Stanley has added an extra 3 basis points to its core CPI forecast to account for this.
Andrew Schneider, Senior US Economist at BNP Paribas, noted that the October-November data appeared excessively weak, partly because housing data was artificially suppressed, and the shifting data collection window provided an extra "promotional" boost to some discretionary consumer categories. As these methodological issues fade in December, the year-over-year increases for both core and headline inflation could even reach 2.8%. Services Price Rebound and Tariff Concerns Regarding specific components, economists anticipate noticeable rebounds in hotel prices, airfares, and apparel costs. Bank of America economists predict that the pace of food, core goods, and core services inflation will all accelerate compared to November. However, Mike Reid, US Economics Chief at Royal Bank of Canada, holds a different view, expecting only a modest increase in Owners' Equivalent Rent (OER), which would help contain the December inflation figures, given that housing costs account for over one-third of the CPI's weight. Looking ahead, the sources of inflation pressure are shifting from purely services to tariff pass-through. Analysis from J.P. Morgan's Market Intelligence team indicates that while companies have recently shown restraint in raising prices due to motivations to maintain market share, the latest GDP data suggests a growing number of firms are attempting to pass on increased input costs to consumers. Seema Shah, Chief Global Strategist at Principal Asset Management, believes that although the inflationary effects of high tariffs have not fully materialized yet, the risk of persistent price increases remains, and inflation is expected to remain slightly elevated in 2026. Stephen Stanley of Santander also warned that a "wave" of tariff-related price increases will hit in the first few months of 2026. Many companies have explicitly stated in earnings calls and business surveys that they plan to begin passing the higher costs from tariffs on to consumers. Stanley added that inflation data in the coming months might provide the Fed with justification to keep rates steady. Fed Policy Path and Independence Concerns Although Fed officials have recently noted that monetary policy is in an unstable state, inflation has stagnated above the 2% target for much of the past year. Headline CPI readings have long hovered in a range of 2.3% to 3.0%, while core CPI has stubbornly remained at mid-to-high 2% levels. The risk of inflation re-accelerating has been identified by J.P. Morgan as one of the high-probability risks facing US stocks in the first half of 2026. While a single CPI report cannot confirm this hypothesis, combined with the previously released non-farm payrolls data, tonight's figures could further delay market expectations for Fed rate cuts. J.P. Morgan economists predict the Fed may hold rates steady throughout fiscal 2026. Furthermore, Matt Weller, Head of Market Research at FOREX.com, pointed out that the US Department of Justice's subpoena of Fed Chair Powell increases risks to the Fed's independence. Although currently seen as a low probability, this has sparked market speculation that President Trump might appoint a new chair prematurely. Should this occur, regardless of current inflation data, more aggressive rate cuts could materialize. However, under the baseline scenario, unless inflation falls sharply in the first quarter, the central bank is likely to stand pat. Market Reaction Scenario Predictions For the upcoming CPI release, J.P. Morgan's Market Intelligence team constructed a prediction matrix for the Core CPI month-over-month rate (Core MoM) and the S&P 500 index (SPX) reaction:
Core MoM between 0.35% and 0.40% (Highest probability, 40.0%): Expected SPX gain of 0.25% to 0.75%. Core MoM between 0.40% and 0.45% (Probability 32.5%): Expected SPX fluctuation between a gain of 0.25% and a loss of 0.75%. Core MoM between 0.30% and 0.35% (Probability 20.0%): Expected SPX gain of 1% to 1.5%. Core MoM above 0.45% (Probability 5.0%): Expected SPX sharp decline of 1.25% to 2.5%. Core MoM below 0.30% (Probability 2.5%): Expected SPX gain of 1.25% to 1.75%.
The foreign exchange market is closely watching tonight's data, particularly the USD/JPY (US Dollar/Japanese Yen) pair, which typically reacts most directly to US data. Technically, USD/JPY is currently in a long-term uptrend and testing prior resistance near the 158.00 level.
Weller analyzed that if inflation data exceeds expectations, it would increase the likelihood of an upward breakout, opening bullish potential. However, traders should be wary of the risk of direct intervention by Japan's Ministry of Finance if the pair approaches 159. Conversely, if inflation data unexpectedly cools, traders might bring forward bets on Fed rate cuts, leading to a pair correction, potentially down to 157.00 or lower.
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