US Inflation Preview: Anticipating the CPI Release

Overview

The trading community is gearing up for the release of the US Consumer Price Index (CPI) scheduled for tomorrow at 8:30 A.M. (ET). This report is crucial as it follows a mixed bag of economic data, including a disappointing Retail Sales figure and a stronger-than-expected Non-Farm Payrolls report. The CPI data will be pivotal in shaping expectations for potential interest rate cuts by the Federal Reserve in 2026.

Recent Economic Context

The Federal Reserve has shifted its focus from inflation to a weakening labor market, leading to a series of interest rate cuts from September to December 2025. The current rate stands at 3.75%, down from 4.50%. Despite a significant drop in Non-Farm Payrolls in October, the labor market has shown signs of recovery, which has prompted the Fed to reconsider its inflation stance.

Core CPI has remained stubbornly above the Fed's 2% target, hovering closer to 3% throughout 2025, influenced by lingering effects from the Trump Tariffs. This situation has created tension within the Fed as they navigate their dual mandate of promoting maximum employment and stable prices.

Expectations for the Upcoming CPI Report

The upcoming CPI report is expected to show a month-over-month increase of +0.3%, bringing the year-over-year rate to 2.5%. However, this figure may be skewed due to a high base effect from January 2025, when Core CPI was at 3.1%. The report's accuracy has also been affected by the longest government shutdown in history, which hindered data collection.

Market participants are particularly attentive to the Producer Price Index (PPI), which typically influences CPI with a lag of 3 to 6 months. The Fed's current composition includes some hawkish members, which may lead to a cautious approach regarding future rate cuts.

Market Reactions and Scenarios

Market reactions to the CPI report could vary significantly based on the results:

• As-Expected: If the CPI meets expectations, stock markets may test recent all-time highs, while metals could continue to see outflows.
• Inflation Beats: A higher-than-expected CPI could lead to declines in stocks, metals, and cryptocurrencies, with a potential rally in the US Dollar.
• Inflation Misses: A lower-than-expected CPI could trigger rallies in stock indexes and cryptocurrencies, while the US Dollar may weaken significantly.

The extent of market movements will depend on the magnitude of any surprises in the CPI data.