{"id":4145,"date":"2026-01-17T14:39:21","date_gmt":"2026-01-17T14:39:21","guid":{"rendered":"http:\/\/ft365.org\/index.php\/2026\/01\/17\/u-s-inflation-tariffs-and-data-distortions-whats-next-for-the-fed\/"},"modified":"2026-01-17T14:39:21","modified_gmt":"2026-01-17T14:39:21","slug":"u-s-inflation-tariffs-and-data-distortions-whats-next-for-the-fed","status":"publish","type":"post","link":"http:\/\/ft365.org\/index.php\/2026\/01\/17\/u-s-inflation-tariffs-and-data-distortions-whats-next-for-the-fed\/","title":{"rendered":"U.S. Inflation, Tariffs and Data Distortions: What\u2019s Next for the Fed?"},"content":{"rendered":"<div dir=\"ltr\">\n<p>If you\u2019ve been waiting for inflation to magically drop back to the Fed\u2019s 2% target, December\u2019s data just delivered a reality check. Consumer prices rose 2.7% year-over-year in December 2025, exactly the same pace as November, while core CPI showed a slower than expected 0.2% monthly uptick.<\/p>\n<p>For beginner traders trying to understand why markets reacted the way they did (or didn\u2019t), this inflation report tells a bigger story: It\u2019s about tariffs that haven\u2019t fully hit consumer prices yet, shelter costs that refuse to budge, and a Fed that\u2019s caught between sticky inflation and a cooling job market.<\/p>\n<p>Let\u2019s break down the numbers, how markets took the news, and why it matters for your next trading decisions.<\/p>\n<h2>The Basics: Analyzing December Inflation Data<\/h2>\n<p><strong>Headline inflation held steady at 2.7% year-over-year<\/strong>, matching November\u2019s rate and meeting economist expectations. On a monthly basis, prices rose 0.3% in December.<\/p>\n<p><strong>Core inflation came in at 2.6% annually<\/strong>, which is slightly below the 2.7% that economists predicted and the lowest level since early 2021. Month-over-month, core prices (which exclude volatile food and energy) rose just 0.2%, undershooting expectations of 0.3%.<\/p>\n<p><strong>Why does \u201ccore\u201d matter?<\/strong> The Fed watches core inflation closely because it strips out the noise from gas and grocery prices that bounce around. It gives a clearer picture of whether inflation is truly baked into the economy.<\/p>\n<p>The biggest price increases hit where Americans feel it most:<\/p>\n<ul>\n<li> <strong>Food prices jumped 3.1% annually<\/strong> and 0.7% monthly\u2014the highest monthly gain since 2022. Ground beef prices surged 15.5% over the year, coffee shot up 19.8%, and even bananas cost 5.9% more.<\/li>\n<li> <strong>Shelter costs rose 3.2% year-over-year<\/strong>, accounting for the largest single factor in the monthly increase. Rent and homeowner costs both climbed 0.4% in December alone.<\/li>\n<li> <strong>Energy prices moderated<\/strong>, rising just 2.3% annually compared to 4.2% the previous month. Gasoline prices actually fell 3.4% year-over-year and dropped 0.5% for the month.<\/li>\n<\/ul>\n<p>One bright spot: <strong>egg prices plummeted 20.9% from a year ago<\/strong> as supply chain issues from avian flu eased. Great news for the baking industry and for egg white chugging weightlifters out there!<\/p>\n<p><strong>Wholesale prices tell the same story<\/strong>, and it\u2019s not great. A day after the CPI report was released, the Producer Price Index (PPI) for November 2025 revealed that wholesale inflation remains elevated. The PPI rose 0.2% month-over-month, matching expectations, with goods prices jumping 0.9% \u2013 the largest monthly gain since February 2024. Year-over-year, headline PPI climbed to 3.0% from 2.8%, surpassing expectations of 2.7%.<\/p>\n<p><strong>Why does PPI matter?<\/strong> It\u2019s a leading indicator of consumer inflation. When producers pay more for energy, raw materials, and intermediate goods, they eventually pass those costs to consumers. The 4.6% surge in energy costs in November and gasoline prices jumping 10.5% signal that upward price pressures are building in the pipeline and could show up in future consumer prices.<\/p>\n<p>Core PPI (excluding food and energy) was flat in November, cooling from October\u2019s 0.3% rise, but the annual rate still climbed to 3.0% from 2.9%. This mixed signal, with moderating monthly core but rising headline PPI, keeps the Fed cautious about declaring victory on inflation.<\/p>\n<p>There is a major caveat on the data, too. <strong>The 43-day government shutdown from October through mid-December disrupted normal data collection.<\/strong> The BLS couldn\u2019t gather October data at all, and November\u2019s numbers were patched together. Some economists believe this creates distortions, possibly making November look artificially low and December appear higher than reality.<\/p>\n<h2>Why It Matters: Fed Policy Impact<\/h2>\n<p><strong>The Federal Reserve has more reason to hit the pause button on rate cuts.<\/strong> After lowering interest rates three times in late 2025 (September, October, and December), the Fed has made it clear they\u2019re done for now. Markets are pricing in a 95-97% chance that rates stay at 3.5%-3.75% when the Fed meets January 27-28, 2026.<\/p>\n<p><img decoding=\"async\" loading=\"lazy\" alt=\"Inflation and the Fed\" width=\"569\" height=\"359\"  src=\"http:\/\/ft365.org\/wp-content\/uploads\/2026\/01\/localimages\/fed-whats-next-2026-01-15.png\"  >Fed Chair Jerome Powell said as much after December\u2019s rate cut: \u201cWe\u2019re now at the point where it makes sense to slow the pace of further adjustments.\u201d Translation: inflation is still too high, and we\u2019re not convinced it\u2019s headed back to 2% fast enough.<\/p>\n<p>Why the hesitation? Core inflation has been above the Fed\u2019s 2% target for 55 straight months. That\u2019s nearly five years of prices running hotter than the central bank wants. Even though the annual rate dipped to 2.6%, that\u2019s still very much above target.<\/p>\n<p><strong>The tariff wildcard complicates everything.<\/strong> President Trump\u2019s tariffs, which at one point reached 145% on some Chinese goods, are estimated to have added about 0.5 percentage points to inflation in 2025. Goldman Sachs analysts project tariffs could add another 0.3 percentage points in just the first half of 2026.<\/p>\n<p>If you thought tariffs already showed up in inflation, think again. The full impact is still coming. The November PPI report showed goods prices surging 0.9% in a single month, with gasoline up 10.5% and energy costs jumping 4.6%. This wholesale inflation hasn\u2019t fully filtered through to consumer prices yet.<\/p>\n<p>This was likely because <strong>businesses absorbed most of the tariff costs in 2025 to avoid scaring off customers<\/strong>, but that can\u2019t last forever. JPMorgan estimates businesses ate roughly 80% of tariff costs last year, but that could flip to just 20% in 2026 as inventory stockpiles run out and price increases become unavoidable.<\/p>\n<p><strong>Markets barely blinked.<\/strong> The U.S. Dollar Index showed a brief dip when the core inflation number came in softer than expected, then quickly recovered and ended higher. Stock futures initially rose, then flattened.<\/p>\n<p>Why the muted reaction? Traders were already expecting the Fed to stay on hold, and one month of data (especially muddled with shutdown-related quality concerns) isn\u2019t enough to change the game.<\/p>\n<p>When the PPI report was released the next day, the dollar underwent a bearish drift throughout the New York session, as financial markets likely focused on flat core PPI and the persistent political pressure on the Fed to ease.<\/p>\n<h2>What to watch next<\/h2>\n<ul>\n<li> <strong>January 27-28, 2026:<\/strong> The Fed\u2019s next policy meeting. Expect no change to rates, but listen carefully to Jerome Powell\u2019s press conference for hints about when cuts might resume.<\/li>\n<li> <strong>February 11, 2026:<\/strong> January CPI data releases. This will be the first \u201cclean\u201d inflation read without shutdown distortions.<\/li>\n<li> <strong>Trump tariff announcements:<\/strong> Any new tariff policies or rollbacks could shift the inflation outlook dramatically.<\/li>\n<li> <strong>Labor market data:<\/strong> If unemployment starts climbing toward 5%, the Fed may prioritize jobs over inflation and cut sooner. If it stays stable, expect a long pause.<\/li>\n<\/ul>\n<p><strong>The big risk:<\/strong> Inflation stays sticky around 2.5-2.7% for most of 2026, forcing the Fed to keep rates higher for longer. This would support the dollar but could pressure stocks, especially sectors sensitive to borrowing costs like real estate and small-cap companies.<\/p>\n<p><strong>The big opportunity:<\/strong> If tariff-driven inflation proves temporary and service prices finally cool, the Fed could cut 2-3 times in the second half of 2026. This would be bullish for risk assets and bearish for the dollar.<\/p>\n<h2>The Bottom Line<\/h2>\n<p>December\u2019s inflation report confirmed what the Fed already suspected: the final mile back to 2% inflation will be the hardest. With consumer prices stuck at 2.7%, core at 2.6%, wholesale inflation climbing to 3.0%, and tariffs still working through the system, <strong>the Fed has every reason to stay patient on rate cuts.<\/strong><\/p>\n<p>With that, don\u2019t count on imminent Fed rate cuts. Position for higher-for-longer rates through at least mid-2026. Watch core services inflation (especially shelter) for signals about when the Fed might finally cut again. And remember that in an environment where inflation surprises can move markets, risk management isn\u2019t optional.<\/p>\n<p>The inflation fight isn\u2019t over. It\u2019s just entered a grinding phase where patience wins, both for the Fed and for traders smart enough to adjust their expectations.<\/p>\n<hr>\n<blockquote>\n<p><strong>Disclaimer:<\/strong> This article is for educational and informational purposes only and should not be considered as investment advice. Trading foreign exchange on margin carries a high level of risk and may not be suitable for all investors. Past performance is not indicative of future results. Always conduct your own research and consult with a licensed financial advisor before making any investment decisions.<\/p>\n<\/blockquote><\/div>\n","protected":false},"excerpt":{"rendered":"<p>If you\u2019ve been waiting for inflation to magically drop back to the Fed\u2019s 2% target, December\u2019s data just delivered a reality check. Consumer prices rose 2.7% year-over-year in December 2025, exactly the same pace as November, while core CPI showed a slower than expected 0.2% monthly uptick. For beginner traders trying to understand why markets<\/p>\n","protected":false},"author":2,"featured_media":4146,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[],"class_list":["post-4145","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-latest-news"],"featured_image_urls":{"full":["http:\/\/ft365.org\/wp-content\/uploads\/2026\/01\/4145-inflation-data-distortions-fed-780x406.png",780,406,false],"thumbnail":["http:\/\/ft365.org\/wp-content\/uploads\/2026\/01\/4145-inflation-data-distortions-fed-780x406-150x150.png",150,150,true],"medium":["http:\/\/ft365.org\/wp-content\/uploads\/2026\/01\/4145-inflation-data-distortions-fed-780x406-300x156.png",300,156,true],"medium_large":["http:\/\/ft365.org\/wp-content\/uploads\/2026\/01\/4145-inflation-data-distortions-fed-780x406-768x400.png",640,333,true],"large":["http:\/\/ft365.org\/wp-content\/uploads\/2026\/01\/4145-inflation-data-distortions-fed-780x406.png",640,333,false],"1536x1536":["http:\/\/ft365.org\/wp-content\/uploads\/2026\/01\/4145-inflation-data-distortions-fed-780x406.png",780,406,false],"2048x2048":["http:\/\/ft365.org\/wp-content\/uploads\/2026\/01\/4145-inflation-data-distortions-fed-780x406.png",780,406,false],"morenews-featured":["http:\/\/ft365.org\/wp-content\/uploads\/2026\/01\/4145-inflation-data-distortions-fed-780x406.png",780,406,false],"morenews-large":["http:\/\/ft365.org\/wp-content\/uploads\/2026\/01\/4145-inflation-data-distortions-fed-780x406.png",780,406,false],"morenews-medium":["http:\/\/ft365.org\/wp-content\/uploads\/2026\/01\/4145-inflation-data-distortions-fed-780x406-590x406.png",590,406,true],"crawlomatic_preview_image":["http:\/\/ft365.org\/wp-content\/uploads\/2026\/01\/4145-inflation-data-distortions-fed-780x406-260x135.png",260,135,true]},"author_info":{"display_name":"henry","author_link":"http:\/\/ft365.org\/index.php\/author\/henry\/"},"category_info":"<a href=\"http:\/\/ft365.org\/index.php\/category\/latest-news\/\" rel=\"category tag\">Latest News<\/a>","tag_info":"Latest News","comment_count":"0","_links":{"self":[{"href":"http:\/\/ft365.org\/index.php\/wp-json\/wp\/v2\/posts\/4145","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/ft365.org\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/ft365.org\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/ft365.org\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"http:\/\/ft365.org\/index.php\/wp-json\/wp\/v2\/comments?post=4145"}],"version-history":[{"count":0,"href":"http:\/\/ft365.org\/index.php\/wp-json\/wp\/v2\/posts\/4145\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/ft365.org\/index.php\/wp-json\/wp\/v2\/media\/4146"}],"wp:attachment":[{"href":"http:\/\/ft365.org\/index.php\/wp-json\/wp\/v2\/media?parent=4145"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/ft365.org\/index.php\/wp-json\/wp\/v2\/categories?post=4145"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/ft365.org\/index.php\/wp-json\/wp\/v2\/tags?post=4145"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}