🥛 What’s going on with inflation? 🏷️

GM. This is Milk Road Macro, the newsletter that hits cleaner than a freshly wiped windshield… and today’s CPI print is finally a “clean” one too.

Here’s what we’ve got for you today:

✍️ Everything you need to know about where inflation is and where it’s going.
🎙️ The Milk Road Macro Show: 2026 Will Be a Roller Coaster Market (Here’s How to Survive It) w/ Michael Lebowitz.
🍪 Trump has been deliberating about taking military action in Iran.

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EVERYTHING YOU NEED TO KNOW ABOUT WHERE INFLATION IS AND WHERE IT’S GOING

Inflation is the big bogeyman holding the Federal Reserve back from cutting interest rates.

So, what’s going on with inflation?

Earlier this week, we saw the December CPI report - the first "clean" report we’ve seen in months.

There was a big data blackout during the government shutdown late last year.

And then there were big questions over the data for last month’s CPI report.

So, this report was important to see exactly where we are with inflation.

And from my point of view, it’s clear - inflation is moderating.

So, what was the data?

What does this mean?

And how are Fed rate cut expectations shaping up?

Let’s take a look…

What was the data?

Headline CPI (Consumer Price Index) printed 2.7% year-on-year, in line with expectations.

It’s edging lower from its most recent peak in September 2025.

Source: Zero Hedge

On a month-on-month basis, CPI printed 0.3%, in line with expectations.

Source: Zero Hedge

Core CPI, which strips out the volatile food and energy segments, printed 2.6% year-on-year, below expectations of 2.7%.

Source: Zero Hedge

And 0.2% month-on-month, below expectations of 0.3%.

Source: Zero Hedge

Both CPI and Core CPI have been disinflating for several months now.

But let’s look a little deeper into the data to see what’s going on here.

Goods inflation had been rising concerningly since mid-2024.

Many people think this rise was fueled in part by tariff effects.

But now, goods inflation has started to roll over and head lower - which could be an indication that any potential “temporary” tariff boost to inflation is passing through.

Source: Augur Infinity

Meanwhile, Core Services continues to disinflate, as it has been doing for several years.

Source: Augur Infinity

One big factor keeping CPI higher is shelter.

This is a segment called Owners Equivalent Rent (OER) - where rent prices are estimated, so it’s not actually based on real data.

It’s a big part of the overall CPI basket and it’s still slowly edging lower from its huge peak in 2022.

But this measure is horrendously lagging and not representative of actual real-time prices.

OER (red line) often lags home prices (blue line) by well over a year.

Source: Hedgeye

This signals that OER should continue to disinflate for months to come yet and continue to be less of an upward drag on the headline inflation number.

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EVERYTHING YOU NEED TO KNOW ABOUT WHERE INFLATION IS AND WHERE IT’S GOING (P2)

What does this mean?

As I’ve been writing about for some time in newsletters and reports, there is now definitely a meaningful disinflationary impulse brewing.

If we “annualize” the December MoM prints, and compare to where we were sitting in September - there’s a stark difference.

3-month annualized CPI: current 2.1%, September 3.6%.

3-month annualized Core CPI: current 1.6%, September 3.6%.

And my view is that we should continue to see inflation generally moderate in the coming months.

This is a view shared by the market.

Market-derived expectations of average inflation looking ahead one year (one-year inflation swaps) surged higher through large parts of 2025 - possibly due to fears of tariff effects.

But now they have collapsed.

Source: Augur Infinity

Rick Reider, of BlackRock, said:

“Last year brought the profound shock of the highest tariffs in decades. We continue to believe that inflation’s spotlight is dimming though somewhat sticky above the Federal Reserve’s target. As pricing pressures should continue to normalize, inflation has become yesterday’s problem. As a result of these factors, we think the Fed is likely to become increasingly concerned about genuine labor market weakness and will respond with modest reductions in the policy interest rate. However, given the noisiness of recent data, including this report, the Fed will probably choose to wait a meeting, or so, to begin cutting rates again.”

Ellen Zentner, of Morgan Stanely, added:

“We’ve seen this movie before. Inflation isn’t reheating, but it remains above target. There’s still only modest pass-through from tariffs.This report doesn't give the Fed what it needs to cut interest rates later this month.”

How are Fed rate cut expectations shaping up?

Despite the generally promising CPI report, it’s still looking very unlikely that the Federal Reserve will cut interest rates in January.

Odds for a cut at the next meeting on January 28 are currently just 5%, according to interest rate markets.

Source: CME FedWatch

Overall, market expectations currently sit at two 25bps rate cuts for 2026 - with the first cut expected in June.

Wrapping up

We didn’t see enough in this inflation report to get rate cuts firmly back on the table.

But if the disinflation trend remains (I think it will) - the Fed should be on track to resume cutting rates later this year.

If we see inflation continuing to moderate, while economic growth momentum accelerates - this is a “Goldilocks” economic environment.

Or in other words - “just right” - the perfect environment for risk assets to perform well.

And right now, U.S. growth momentum is turning higher again after a “growth scare” in Q4 2025.

Source: Augur Infinity

In my view, things are looking good for “Goldilocks” in the months ahead.

That’s it for this edition - catch you in the next one.

2026 MARKET SURVIVAL PLAYBOOK 📉

In today’s episode, we sat down with Michael Lebowitz, portfolio manager & RIA Advisors, to talk about why 2026 could be a roller coaster market and how investors can position through the volatility.

Here is what we covered:

Why tariff headlines, court delays, and Trump’s Plan B are fueling short-term market swings.
What Fed subpoenas, reserve management purchases, and hidden QE mean for bonds, stocks, and crypto.
How to read bond auction internals and why recent demand signals matter for yields.
Where risks and opportunities lie across AI, gold, silver, and portfolio rotation heading into 2026.

Tune in and see for yourself 👇

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