Another benign inflation report is expected to be released on Tuesday, at least according to consensus economist estimates and prediction markets.

Wall Street broadly expects the annual inflation rate to remain stable at 2.7% in December, with the monthly pace coming in at 0.3% — numbers that are far from triggering broad-based market concerns.

According to the Federal Reserve Bank of Cleveland's Inflation Nowcasting model, inflation may come in even softer, projecting a 0.2% month-over-month increase and a 2.6% year-over-year rate.

When excluding food and energy, core inflation is expected to tick slightly higher, from 2.6% to 2.7% annually, with a monthly gain of 0.3%.

Betting Markets Echo Wall Street's Calm

Prediction markets are reinforcing the narrative of contained inflation. On Polymarket, traders are pricing in an 89% probability that annual inflation lands at or below 2.8%.

The odds of a hotter print are slim: a 6% chance for 2.9% inflation and just 1% for 3%.

That skewed confidence has an interesting side effect — it makes hedging an upside inflation surprise relatively cheap. A $100 wager betting that inflation exceeds 2.8% (meaning at least 2.9%) would pay roughly $800 if it materializes.

Monthly inflation odds paint a more nuanced picture. The most likely outcome is a 0.3% print with a 37% probability, closely followed by 0.2% at 34%.

A firmer 0.4% monthly reading carries a 21% chance, while a sharp 0.5% increase is priced at just 4%.

Investors Expect Little Drama

Survey data suggests investors are broadly comfortable with the inflation trajectory. According to 22V Research analyst Dennis DeBusschere, 33% of investors expect a risk-on reaction to the CPI report, while 45% anticipate a mixed or negligible response. Only 21% foresee a risk-off move.

Notably, 66% of investors believe core CPI is on a "Fed-friendly glide path," near record highs in the firm's surveys.

Still, not everyone is fully convinced. Ed Yardeni cautioned that recent inflation data may have been distorted by last fall's 43-day government shutdown, which likely hampered the Bureau of Labor Statistics' data collection.

That uncertainty, he indicates, raises the importance of the latest CPI and PPI releases as some of the final key inputs ahead of the Federal Open Market Committee's late-January rate decision.

According to CME FedWatch, markets are assigning a 95% probability that interest rates remain unchanged at 3.50%–3.75% at the Jan. 28 meeting.

Fed futures continue to fully price in two rate cuts by the end of 2026.

Bank of America Sees Upside Risk

Economists at Bank of America, led by Stephen Juneau, are slightly more cautious. Their December CPI preview expects headline and core inflation to rise 0.4% and 0.3% month-over-month, respectively, with both annual rates at 2.7%.

They argue that November inflation was likely biased downward due to carry-forward imputation and a late start to data collection during the shutdown.

As a result, December could see some "payback," particularly in goods prices. While Bank of America still believes inflation is not a primary concern for policymakers, they see risks skewed modestly to the upside.

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