As of noon New York time today, January 15, the Standard & Poor’s 500 was ahead 1.30%. The NASDAQ Composite and the small-cap Russell 2000 were both up 1.80% on the session.

Today’s big moves come on relatively minor changes in inflation trends in this morning’s report on CPI inflation in December. And I think they have more to do with how afraid Wall Street is that the Federal Reserve isn’t going to deliver at least one or two interest rate cuts in 2025 than with any big news in today’s report.

The consumer price index (CPI) rose at an annual rate of 2.9% in December, up from a 2.7% annual rate the previous month. That increase was in line with expectations. On a month-to-month basis, the index rose 0.4%.

The “core” index, which strips out volatile food and energy prices and is much more important to the Fed than the headline inflation number, rose at a 3.2% annual rate in December. That was down slightly from its annual rate of 3.3% in November, and less than economists had expected.

It’s this dip in the annual rate of core inflation that has investors feeling so optimistic today.

Of course, core CPI inflation is still well above the Fed’s target rate of 2.00%. (The Fed uses the PCE, Personal Consumption Expenditures, index as its inflation measure. The CPI typically runs hotter than the PCE.)

Wall Street is also choosing to see “real’ inflation as lower than “temporary” inflation. For example,
vehicle prices and air fares increased, but the argument is that those higher prices were a result of replacement buying after hurricanes and a busy holiday travel season.

In my view, the data doesn’t significantly change the inflation picture. Yes, the 3.2% increase in annual core inflation is down from the 3.3% annual rate for the last three months. But inflation remains stubbornly above the Fed’s 2% target. And the Fed is still looking at big uncertainties in the economy due to new economic policies from the incoming Trump Administration.

“When you step back and look at the overall state of inflation, we’re not really going anywhere,” Sarah House, senior economist at Wells Fargo told Bloomberg. “While there has been progress, the pace has been really disappointing.”

Prices continued to rise in some of the categories that matter most to consumers. Grocery prices, which were relatively flat in late 2023 and early 2024, are rising again, led by the price of eggs, which is up by more than a third over the past year. Gas prices jumped 4.4% in December, although they were lower than a year ago.

Investors widely expect the central bank to hold interest rates steady at its January 29 meeting.

The key issue for market direction remains what happens after January. Will the Fed go on a protracted hold on rates–and how long might that hold be? Specultation is focused now on the next cut coming on June 18 or July 30.

What spooked the market last week, however, was not just the possibility of a hold that lasts longer than July but the possibility–still small I think–that the next move by the Fed will be to raise interest rates to head off a rise in inflation due to higher tariffs and other policies from the Republican administration.