Moderating Inflation and Resilient Growth Reinforce a Patient Federal Reserve Policy Path

Matthew Rubin Chief Investment Officer

 

1. Softer inflation paired with solid job growth facilitated a wait-and-see stance from the Federal Reserve.
2. Stronger payroll growth and still-low jobless claims support steady policy as inflation remains firm.
3. Retail sales were flat in December, but underlying fundamentals suggest consumption is likely to sustain growth in 2026.

 

1. Inflation Eased in January but Remains Above Target

Inflation cooled in January, with consumer prices rising 2.4% from a year earlier, down from 2.7% in December and slightly below expectations.¹ Core inflation, which excludes food and energy, increased 2.5% on an annual basis, in line with forecasts.¹ On a monthly basis, headline prices rose 0.2% while core prices increased 0.3%, suggesting that underlying price pressures remain firm despite some improvement in the annual figures.¹

The moderation in inflation was helped in part by lower gasoline and used vehicle prices, though services inflation remained elevated. Costs for areas such as air travel and healthcare continued to rise, highlighting ongoing pressure in labor-intensive sectors. Some goods prices also moved higher, indicating that pricing pressures have not fully subsided.

Combined with last week’s stronger-than-expected jobs report, the data point to an economy that remains stable but not yet fully aligned with the Federal Reserve’s 2% inflation objective.² While inflation has eased significantly from its peak, progress appears to be gradual. As a result, policymakers are likely to maintain a patient approach, waiting for clearer and more sustained evidence that price pressures are moving lower before considering additional rate cuts.

2. Labor Data Reinforces a Patient Policy Outlook

Initial unemployment claims came in above expectations last week, holding near 230,000 following the prior week’s jump.³ The four-week moving average rose to about 220,000, its highest level in roughly three months.³ Even so, claims remain low by historical standards, suggesting limited stress in the labor market.

The delayed January payroll report added to that narrative. Employers added 130,000 jobs, well above expectations and the strongest gain in a year.¹ Healthcare once again accounted for much of the increase. 2025’s annual revisions were published last week and reduced prior job totals by 862,000.¹ This indicates the pace of hiring in 2025 now appears to have been slower, but not as weak as originally anticipated. In January, the unemployment rate edged down, labor force participation improved, hours worked increased, and manufacturing employment expanded for the first time since 2024.²

Together, the data point to a labor market that is cooling gradually but remains stable. With inflation still elevated and consumer prices expected to rise 0.3% month-over-month in the latest report, policymakers appear inclined to hold interest rates steady until clearer signs of disinflation emerge.¹

3. Consumer Spending Paused at Year-End

Consumer spending stalled in December, with headline retail sales unchanged from the prior month, falling short of expectations for a modest gain. Core retail sales, which exclude auto, gasoline, and building materials, slipped 0.1% instead of posting an anticipated increase.⁴ This softness was broad-based. Sales declined at furniture and home furnishing stores, miscellaneous retailers, and clothing stores, while purchases of building materials provided one of the few areas of strength.⁴

Although the data reflected a slower finish to 2025, the broader outlook for household spending remains constructive. Larger tax refunds tied to legislation passed last year are expected to provide a modest boost to disposable income. At the same time, monetary policy has begun to ease, while the labor market continues to cool gradually without showing significant deterioration. These factors are likely to help support steady consumption trends and keep overall economic growth near a moderate pace in 2026.

For the period ending 2/13/26.
* Small-cap stocks are represented by the Russell 2000^® Index. International stocks are represented by the MSCI EAFE. Bonds are represented by the Bloomberg US Aggregate Bond Index. Oil is represented by WTI Oil (West Texas Intermediate Oil), a benchmark for light, sweet crude oil and a primary measure for pricing oil contracts and futures in the U.S.

Sources
¹ U.S. Bureau of Labor Statistics
² The Federal Reserve
³ U.S. Department of Labor
⁴ U.S. Census Bureau

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The Consumer Price Index (CPI) measures the monthly change in prices paid by U.S. consumers. The Bureau of Labor Statistics (BLS) calculates the CPI as a weighted average of prices for a basket of goods and services representative of aggregate U.S. consumer spending. The CPI is a measure of inflation and deflation. The CPI report uses a different survey methodology, price samples, and index weights than the producer price index (PPI).
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