The Math Is About to Get Friendlier for Inflation

• Annualized CPI growth was 2.7% in December.

• The most difficult comps are at the start of 2026.

• Annualized growth could hit 2% as soon as February.

The toughest inflation comps are about to fade, setting up a slower path from here…

After spending multiple decades pitching ideas to money managers, you learn how to surface catalysts that resonate on contact. And one of those is that investors never tire of a compelling growth arc. A business can look like it’s losing steam simply because it’s running into last year’s blockbuster results. But once those tough comps fall away, the year‑over‑year math turns friendly, momentum reappears, and the company’s stock usually rallies.

The same dynamic applies to stock‑market‑moving economic data. As I highlighted last month, we’re heading into a similar setup for annualized inflation growth. In early 2026, the consumer price index (“CPI”) faces its toughest comparisons from 2025. January and February alone account for just over 40% of the current pace. That makes it hard for monthly growth to accelerate…

As those heavyweights drop out and new data replace them, the annualized inflation pace should ease. That expands the Federal Reserve’s rate-cut cushion—giving it more room to support the economy if growth slows. The switch should underpin a steady rally in the S&P 500 Index.

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

December CPI Data

Yesterday, the U.S. Bureau of Labor released its December CPI report. The release still came with controversy. Because of the October government shutdown, we’re still lacking official numbers. So, skeptics questioned the accuracy of the result. However, the underlying index was tabulated for December, giving us the more important year-over-year results.

Inflation rose 2.7% on an annualized basis, in line with November and the 2.7% consensus estimate…

Real Rates Matter

The annualized result lets us measure the real rate of interest (effective Fed funds minus inflation):

• Effective Fed funds (Dec) 3.6%

• CPI (Dec) 2.7%

• Real Rate (Dec) 1%

In other words, our central bank could cut rates four more times before it hits neutral (neither hurts nor helps economic growth)…

Now, keep in mind, inflation lags monetary policy decisions. Consider this:

• The Fed is on hold after cutting in December.

• The change lowered the real rate to 0.9%.

• The average real rate since 2000 has been -0.6%.

Put together, the Fed has about 150 basis points of room before reaching the traditional real rate. That’s serious economic firepower.

Looking Forward

To gauge the path of inflation, let’s frame the next 12 months against the prior year. The green highlights are easy (meaning inflation could accelerate), the red are hard (meaning inflation could slow), and the blue are neutral…

The data shows:

• January and February are the toughest comparisons.

• They account for 1.1% of the current 2.7% number.

• After February, the comparisons are neutral to easy.

That tells me:

• The odds are against hot inflation early in the year.

• March is the most likely month for a seasonal bump.

• Beyond that, expect a roughly 0.2% pace.

Forecasting Ahead

So, the next step is to project that 0.2% monthly growth into next year. I’ve done this through September…

In the table above, I ran the inflation growth estimates based on the underlying December index data. I also incorporated the current bond market expectations for rate cuts to determine real rates.

Here’s what it suggests:

• Annualized CPI growth could fall to 2% as soon as February.

• The Fed’s real rate cushion should improve moving forward.

• The Fed could cut in June and September, and real rates would hold steady.

Bottom Line

As I said last month, the missing October data isn’t ideal, but it’s the hand we were dealt. It will be a headache next year, but we must work with what we have.

From here, the odds favor easing annualized inflation. That makes real rates look tighter, giving the Fed more room to support growth. And that backdrop should underpin a steady rally in the S&P 500.

Five Stories Moving the Market:

The White House gave a formal green light to China-bound sales of Nvidia's H200, the company’s second most powerful AI chip; the chips will be reviewed by a third-party testing lab to confirm their technical AI capabilities before they can be shipped to China – Reuters. (Why you should care – the provision should boost the outlook for Nvidia’s revenue moving forward)

Early indicators suggest the U.K. economy struggled to bounce back in the weeks after Chancellor of the Exchequer Rachel Reeves’ budget, with a deepening labor market downturn the biggest threat to hopes for a pickup in early 2026 – Bloomberg. (Why you should care – slowing economic growth should keep a lid on inflation, and leave the door open for additional easing from the Bank of England)

Federal Reserve Bank of St. Louis President Alberto Musalem (non-voter) said inflation risks are moderating, and he expects prices to begin converging toward the central bank’s target later this year; Musalem said monetary policy is well positioned after last year’s rate cuts to respond to risks to either price stability or employment – Bloomberg. (Why you should care – the statement strikes a more dovish tilt from Musalem)

JPMorgan CEO Jamie Dimon defended the Federal Reserve after it was subpoenaed by the Justice Department, saying that “anything that chips away” at the central bank’s independence “is not a good idea”; Dimon said political interference with the Fed would cause inflation and interest rates to go up, contrary to President Trump’s stated goal of getting rates to go lower – WSJ. (Why you should care – Dimon said the central bank isn’t infallible, but he respects the process and its independence)

Japanese Prime Minister Sanae Takaichi is said to be planning on the dissolution of parliament when it reconvenes on January 23, setting up a general election as soon as February 8; Seiji Maehara, the head of ruling coalition partner Ishin, said he left a recent meeting left with the impression an imminent election was a possibility – Reuters. (Why you should care – Takaichi would likely hold a snap to election to garner support for her spending plans, boosting the outlook for economic growth and the Japanese stock market)

Economic Calendar:

Earnings: BAC, C, WFC

China – Exports, Imports for December (12 a.m.)

China – New Yuan Loans for December (12 a.m.)

ECB’s De Guindos (Vice President) Speaks (3:15 a.m.)

U.S. - MBA Mortgage Applications (7 a.m.)

U.S. – PPI for December (8:30 a.m.)

U.S. – Retail Sales for November (8:30 a.m.)

U.S. – Business, Retail Inventories for October (10 a.m.)

U.S. – Existing Home Sales for December (10 a.m.)

BOE’s Ramsden (Board Member) Speaks (10:30 a.m.)

U.S. - Energy Information Administration Crude Oil Inventory Data (10:30 a.m.)

Fed’s Bostic (Atlanta, Non‑voter) Speaks (12 p.m.)

Fed’s Kashkari (Minneapolis, Voter) Speaks (12 p.m.)

Fed’s Beige Book (Anecdotal Economic Commentary) (2 p.m.)

Fed’s Williams (New York, Voter) Speaks (2:10 p.m.)