The Inflation Compression Hiding in Plain Sight

• EIA data showed national gas prices held below $3 in January.

• NAR data shows house price growth keeps cooling.

• Fed survey data point to little change in prices received.

Annualized inflation growth is primed for a sharp drop in January…

This week’s CPI release isn’t just another print. It’s a referendum on how much policy flexibility the Federal Reserve really has. The Cleveland Fed’s nowcast points to a modest 0.2% month‑over‑month gain and a year‑over‑year rate slipping to 2.4%, down from December’s 2.7%. On the surface, that looks like gentle progress. But the real story sits in the base effects.

Last January delivered a jarring 0.7% CPI jump. It was the strongest monthly reading of the past year. When a number that large rolls off, even a tame replacement mechanically drags the annualized pace lower. That’s the setup we’re walking into now.

As this year’s January print enters the calculation, last year’s heavyweight drops out. To keep inflation steady—or push it higher—we’d need another 0.7% surge. A 0.2% gain won’t come close. It will pull the annualized rate sharply lower, and it would still be slightly softer than the typical January pattern over the past quarter‑century.

Even so, this outcome alone won’t force the Fed’s hand in March. But it will nudge policymakers to reassess their stance. The numbers I’m watching show the Fed has ample room to cut rates throughout the year—even if inflation edges higher from here. That policy cushion is the quiet tailwind behind a steady S&P 500 rally.

But don’t take my word for it, let’s look at what the data’s telling us…

Gas Prices

The chart below shows the Energy Information Administration’s monthly gasoline price data across all grades. I use this broader measure because not everyone buys the same type of fuel. Looking at the full picture gives a better sense of how price changes affect everyone’s budget, not just one group.

Gas prices fell in January versus last year. The average cost per gallon was $2.94, compared to $3.20 a year ago—an 8.1% decrease…

Historically, gas prices rise in early spring, peak in April, and then gradually ease through the rest of the year. For most of last year, prices were under pressure compared to 12 months earlier. That trend appears intact so far in 2026. Prices contracted sharply in January on concerns of excess oil supply, falling 3% month‑over‑month.

Why does that matter? Because gas prices tend to lead headline CPI. If costs are rising elsewhere due to tariffs, the lack of price pressure here should help keep a lid on overall inflation

Prices Received

This next chart is a gauge I built using monthly manufacturing and services index data from regional Fed banks. They ask businesses whether activity is rising, falling, or holding steady, and then publish indexes to measure the change.

I’ve combined data from Dallas, Kansas City, New York, and Philadelphia—regions that together account for about 32% of national economic output. For this chart, I focused on prices received, a proxy for CPI. The gauge increased nominally in January but stayed within its recent range. During that time, non‑seasonally adjusted CPI has been growing at roughly a 0.2% monthly pace...

I weighted the mix to 65% services and 35% manufacturing to reflect CPI composition. The January reading came in at 19, up from 15 in December. Neither manufacturing nor services showed meaningful change. So, I wouldn’t be surprised to see monthly CPI land in the 0.1% to 0.2% range for January.

House Prices

As I’ve been saying, house price growth is slowing—and that matters. Shelter accounts for 35% of CPI. Owners’ equivalent rent makes up 26%, while rent of primary residence adds another 7.5%. Housing carries real weight.

The latest data from the National Association of Realtors shows continued easing in existing home price growth…

In December, the median existing home price was just over $405,000, a 0.4% year‑over‑year increase. The only weaker month in 2025 was July’s 0.2% gain. Both are far below the typical 7%+ gains seen in prior years. On a month‑over‑month basis, prices fell 1%. It’s highly unlikely the situation suddenly improved in January.

Zooming out, the trend is clear. This marks the tenth straight month of sub‑3% annualized price growth. The last time we saw that was in 2023, when the Fed signaled it was nearing the end of its tightening cycle. That should help keep a lid on runaway prices.

Bringing It All Together

The Fed’s dual mandate is straightforward: stable prices and maximum employment. It uses monetary policy to keep inflation in check while supporting hiring.

Throughout last year, employment data showed a sharp deceleration. Based on the January numbers released last week, that trend remains intact.

So yes, the annualized pace of inflation may still sit above the Fed’s 2% target. But the underlying components suggest inflation is headed lower. If the annualized pace eases when the numbers are released later this week, it should signal to policymakers and investors that the price rebound is over. If we see additional progress in the months ahead, it should give the Fed room to ease rates further—possibly sooner than expected. That would support economic growth and a steady rally in the S&P 500.

Five Stories Moving the Market:

Japanese Prime Minister Sanae Takaichi led her party to a thumping victory in parliamentary elections, handing her a powerful mandate to deepen ties with the U.S. and rev up Japan’s economy – WSJ. (Why you should care – Takaichi campaigned on strengthening the U.S. trade relationship, drawing a harder line on China, and spending more on defense)

Federal Reserve Chair Candidate Kevin Warsh has voiced support for overhauling the relationship between the central bank and Treasury Department with a new version of an agreement from 1951; Warsh has argued previously that the Fed’s balance sheet expansion violates the 1951 agreement – Bloomberg. (Why you should care – Wall Street is speculating the change would involve the Treasury issuing more short-term rather than long-term debt to bring down borrowing costs)

U.S. Treasury Secretary Scott Bessent said he would not expect the Federal Reserve to move quickly to shrink its balance sheet, even under Fed chief nominee Kevin Warsh, who has criticized the U.S. central bank's bond purchases – Reuters. (Why you should care – Bessent’s comments imply monetary policy is likely to get easier not tighter)

Iran’s President Masoud Pezeshkian described recent nuclear talks with Washington as “a step forward”; the White House characterized the discussion as “very god,” while saying more talks were set for this week – Bloomberg. (Why you should care – the positive tone coming out of the talks should help to ease Wall Street concerns around geopolitical tensions)

The United States and India moved closer to a trade pact, releasing an interim framework that would lower tariffs, reshape energy ties and deepen economic cooperation as both countries seek to realign global supply chains – Reuters. (Why you should care – a deal would help to reduce supply-chain reliance on China while potentially easing price pressures)

Economic Calendar:

Earnings – ACGL, AMKR, APO, BDX, GT, ON, PFG, WAT

BOE’s Bailey (Governor) Speaks (Saturday)

Japan – Wage Income for December

Japan – Bank Lending for January

Eurozone – Sentix Investor Confidence for February (4:30 a.m.)

U.S. – Conference Board Employment Trends Index for January (10:00 a.m.)

ECB’s Nagel (Germany) Speaks (11:00 a.m.)

Treasury Auctions $89 Billion in 13-Week Bills (11:30 a.m.)

Treasury Auctions $77 Billion in 26-Week Bills (11:30 a.m.)

Fed’s Waller (Board Member, Voter) Speaks (1:30 p.m.)

BOE’s Mann (MPC Member) Speaks (2:30 p.m.)

Fed’s Bostic (Atlanta, Non-voter) Speaks (3:15 p.m.)