When the US CPI surprises: market expectations of a cut reignite

The release of the November inflation report triggered a strong reaction across global markets. During the evening of December 18th Asian time, data from the U.S. Bureau of Labor Statistics painted a completely different picture from analysts’ forecasts, causing the dollar to plummet and gold to surge upward.

The Impact of Inflation Data in the United States

The overall unadjusted CPI for November came in at 2.7%, well below market expectations of 3.1%. Even more significant was the core CPI, which stood at 2.6% instead of the expected 3.0%, marking the lowest level since March 2021. These numbers caught many market participants off guard.

However, analysts immediately pointed out a noteworthy statistical peculiarity. Due to the U.S. government shutdown in October, the report is incomplete: for the November calculation, it was assumed that October’s change was zero. UBS estimated this statistical bias at about 27 basis points downward. Adjusting U.S. inflation data for this technical factor, the actual figures would significantly align with market expectations of 3.0%.

Despite the statistical “noise,” the underlying structure tells a story of actual inflation cooling. Core services inflation now represents the main driver of the overall core CPI decrease, while housing inflation has contracted sharply, falling from 3.6% to 3.0% year-over-year.

How the Market Has Processed the Inflation Surprise

The immediate reaction was decisive and multidirectional. Nasdaq 100 futures gained over 1%, while U.S. Treasuries saw prices rise and yields compress. In the rate derivatives market, the probability of a Fed cut in January fluctuated from 26.6% to 28.8%.

The dollar took the biggest hit, with the index losing 22 points in the short term to reach a low of 98.20. Other non-U.S. currencies benefited universally: the euro/dollar rose nearly 30 points, while dollar/yen retreated by almost 40 points. Spot gold, a classic safe-haven instrument, gained $16 immediately.

Brian Jacobsen, Chief Economist at Annex Wealth Management, warned: “Some might dismiss this report as ‘less reliable than usual,’ but doing so carries real risks for their positions.”

Internal Tensions within the Fed Between Hawks and Doves

Faced with such a heterogeneous data set, heated discussions are expected among Federal Reserve members—those more cautious versus those more restrictive. The low CPI provides strong ammunition for easing advocates.

Fractures had already emerged in the December meeting, when the 25 basis point cut was approved only with 9 votes in favor and 3 against—the first time in six years with three dissenters. Kansas City Fed President Schmid and Chicago Fed President Goolsbee voted against the cut, preferring to keep rates unchanged, while Governor Milan pushed for even more aggressive reductions.

The Fed’s median dot plot suggests cuts of 25 basis points in both 2026 and 2027, bringing rates to 3.4% and 3.1%, respectively. However, beyond the official consensus, a proliferation of personal opinions emerges. Bostic, President of the Atlanta Fed, even stated that he did not include any cuts in 2026 in his personal projections, believing that the economy will grow around 2.5% with a policy that remains restrictive.

The Path of Rates and Changes in Monetary Policy

Although the dot plot represents a collective forecast, the actual path of the Fed conceals complex economic and political considerations. The current rate range of 3.50%-3.75% marks the institution’s third consecutive cut.

According to BlackRock, the most likely scenario sees rates converging toward 3% by 2026, diverging from the median dot plot of 3.4%—a discrepancy reflecting the gap between market expectations and the Fed’s official guidance.

A transitional element warrants attention: in the fourth quarter of 2025, the Fed will conclude nearly three years of quantitative tightening and, starting January 2026, will implement the new “Reserve Management Purchases” (RMP). Although officially described as a “technical” operation to ensure adequate liquidity, the market tends to interpret it as a form of disguised easing or quasi-quantitative easing, potentially becoming a crucial variable in future policy paths.

What to Watch in Upcoming Economic Data

With the unexpected update on U.S. inflation, the threshold for further rate reductions has become the focal point. The Fed stated in December that this threshold has indeed risen, with the “magnitude and timing” of future cuts dependent on economic developments.

Labor market conditions will be the critical variable. Although inflation has decelerated more than expected, new unemployment claims in November stood at 224,000 versus the 225,000 forecast, reversing the upward trend from the previous week and signaling stability in December.

CMB International Securities notes that the U.S. labor market has slightly weakened but has not experienced significant deterioration. Both initial and continuing claims remain subdued and even showed slight improvement since October.

The institute expects that in the first half of 2026, U.S. inflation could continue to decline thanks to falling oil prices and slowing increases in housing and wages, possibly prompting the Fed to cut rates in June as a political signal. However, in the second half, inflation might rebound, leading the Fed to adopt a wait-and-see stance.

Diverging Scenarios from the Financial Community

Wall Street forecasts for 2026 tell very different stories. ICBC International expects total cuts of 50-75 basis points, bringing rates back to the “neutral” level around 3%.

JPMorgan, on the other hand, adopts a cautious but optimistic outlook, emphasizing how the resilience of the U.S. economy—particularly non-residential fixed investments—will support growth. This would result in a more modest pace of cuts, with rates stabilizing between 3% and 3.25% by mid-year.

ING has built two polar scenarios: the first envisions economic fundamentals deteriorating significantly, prompting the Fed to tighten aggressively against recession risks, pushing the 10-year Treasury yield toward 3%. The second foresees a Fed under political pressure or miscalculation easing monetary policy prematurely or excessively, damaging its credibility and triggering deep fears of uncontrolled inflation, causing the 10-year yield to spike even toward 5%.

The Determinants of the Next Chapter

The transition in Fed leadership could introduce further uncertainties into the political landscape. Powell’s term ends in May 2026, and the appointment of his successor will influence the central bank’s direction and communication.

Guolian Minsheng Securities emphasizes that November’s CPI is unlikely to alter the decision to pause in January but will certainly amplify the voices of more dovish members. If December continues with modest increases, the Fed might reconsider its rate cut trajectory for the coming year.

For investors, BlackRock suggests diversifying fixed income strategies: allocate liquidity into short-term Treasuries or 0-3 month bonds; increase exposure to medium-duration assets; build laddered bond portfolios to lock in yields; and seek higher returns through high-yield bonds and emerging market securities.

Kevin Flanagan of WisdomTree concludes that the Fed is now a “divided house,” with a very high threshold for further easing. With inflation still about one percentage point above the target, it will be difficult for the central bank to proceed with consecutive cuts unless the labor market cools significantly.

While the dollar plummeted and gold rose after the release, the market began recalibrating the rate path for 2026. Whether this is a fleeting statistical anomaly or a genuine decline in U.S. inflation, the Fed’s next move will depend on the lessons that upcoming months of economic data will teach. The seemingly gradual path of the dot plot today faces the dual challenge of economic reality and operator expectations.