US personal consumption expenditures (PCE) price index rose 0.4% month over month in December. This was above the 0.3% forecast.
The December reading was 0.1 percentage points higher than expected. It points to faster monthly price growth than the forecast suggested.
Implications For Fed Policy
This higher-than-expected inflation reading from late last year supports our view that the Federal Reserve will delay any potential rate cuts. The December PCE data signals that underlying price pressures remain stubborn. We should adjust our positions for a more hawkish Fed, at least through the first quarter of 2026.
Since the December release, markets have sharply repriced rate expectations. The CME FedWatch tool shows the probability of a March rate cut has dropped from over 50% at the start of the year to below 20% this week. That shift suggests short-term interest rate futures could face more downward pressure.
For equity markets, this points to higher volatility, especially in interest-rate-sensitive growth and tech stocks. The VIX has already moved up from below 14 in late 2025 to a steadier range around 17. Derivatives traders may want to buy protective puts on indices like the Nasdaq 100 or use bearish call spreads.
The inflation signal was reinforced by a stronger-than-expected January jobs report. The economy added 225,000 jobs, beating estimates. A strong labor market makes continued wage growth more likely, which can keep consumption and inflation elevated. If this continues, a dovish Fed pivot looks unlikely in the near term.
Positioning Across Major Assets
This environment is bullish for the U.S. dollar because higher rates tend to attract foreign capital. We expect the Dollar Index (DXY), already at a three-month high of 104.50, to test higher resistance levels. Long dollar positions against currencies with more dovish central banks, such as the euro or yen, may make sense.
We remember a similar period of stubborn inflation in 2023, when the final move back toward the 2% target was the hardest. That experience showed the risk of positioning for rate cuts too early. The market is now facing that same reality again.
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