Inflation Holds Its Breath: What the Latest U.S. CPI and PPI Mean to Fed, the Dollar, and the Economy

A “Clear” Inflation Reading After Months of Noise


After months of distorted data caused by last year’s government shutdown, the latest U.S. inflation releases finally offered markets something they had been craving: clarity. December’s Consumer Price Index (CPI) and November’s Producer Price Index (PPI) arrived without major surprises, confirming that inflation in the United States remains stubborn—but stable—heading into 2026.


The numbers did not reignite inflation fears, nor did they give policymakers a green light to rush toward rate cuts. Instead, they reinforced a familiar theme: progress is real, but incomplete.


CPI: Cooling, But Still Above Comfort

Consumer inflation rose modestly in December, matching expectations and keeping the annual pace just under 3%. Core inflation—excluding food and energy—also remained steady at its lowest level in years. This signals that the sharp price surges of early 2025 are firmly in the past.


However, the details tell a more nuanced story. Housing-related costs continue to rise faster than most other components, anchoring inflation above the Federal Reserve’s 2% target. Food prices also remain elevated, while energy prices provided some relief thanks to falling gasoline costs. Used car prices dropped again, underscoring ongoing disinflation in goods.
The takeaway: inflation is no longer accelerating, but it is proving difficult to push decisively lower.


PPI: No Inflation Shock in the Pipeline

Producer prices told a similarly calm story. Wholesale inflation edged up slightly, suggesting that cost pressures earlier in the supply chain remain contained. Despite the inclusion of delayed data from the shutdown period, the report showed no signs of a brewing inflation surge that could spill over to consumers in the coming months.


Historically, producer prices can foreshadow consumer inflation. This muted reading strengthens the case that inflationary pressures are not re-emerging behind the scenes.


Market Reaction: Relief, Not Euphoria

Financial markets took the data in stride. Stocks showed mild optimism, supported by the absence of any inflation shock that might force tighter monetary policy. Bond yields held steady or edged slightly lower, reflecting confidence that inflation risks are not intensifying.

The U.S. dollar softened modestly, as the data failed to justify a more aggressive “higher-for-longer” stance from the Federal Reserve. Gold and other defensive assets remained supported, benefiting from lingering policy and geopolitical uncertainties.


What This Means for the Federal Reserve

For policymakers, these reports reinforce a cautious wait-and-see approach. Inflation remains above target, particularly in services and housing, limiting the Fed’s ability to ease aggressively. At the same time, the lack of reacceleration allows officials to avoid further tightening.

The most likely path is a prolonged pause, with only gradual rate cuts later in the year—if inflation continues to cool and the labor market shows signs of easing.


The Dollar and the Broader Economy

The dollar’s outlook remains neutral to slightly soft. With inflation no longer rising and rate cuts still on the table for later in 2026, the greenback lacks a clear catalyst for renewed strength.

For the wider economy, the data supports the “soft landing” narrative. Growth continues without overheating, consumers are under pressure but not overwhelmed, and inflation—while uncomfortable—is no longer spiraling. Risks remain, particularly from trade policy and housing costs, but for now, stability is the dominant theme.


A Transatlantic Contrast: Europe Pulls Ahead

Compared to the U.S., the Eurozone has made faster progress. European inflation has already returned to the central bank’s target, giving policymakers there more flexibility. In contrast, the U.S. remains stuck in a zone of mild but persistent inflation, reinforcing a divergence in policy outlooks between Washington and Frankfurt.


The latest inflation data did not change the story—but that, in itself, is the message. Inflation is no longer the runaway threat it once was, yet it refuses to fade quietly. For markets and policymakers alike, 2026 begins not with urgency, but with patience.