US consumer prices fell as expected in December, lending more plausibility to the Federal Reserve’s “soft landing” scenario, while leaving longer-term interest expectations largely unmoved relative to pre-release levels. According to data published by the Bureau of Labor Statistics this morning, the headline consumer price index rose 6.5 percent in December from the same period last year, down -0.1 percent on a month-over-month basis. Economists polled by the major data providers ahead of the release projected a 6.5 percent annual gain and a -0.1 percent drop relative to November.

A seasonally-adjusted -9.4 percent month-over-month drop in gasoline prices did a lot of the heavy lifting, helping to offset a 0.8 percent increase in shelter costs (largely generated through lagged “equivalent rent” calculations that the Fed tends to look through). Food prices climbed 0.3 percent, decelerating from November’s 0.5 percent gain. New vehicle costs fell -0.1 percent, while used car and truck prices tumbled -2.5 percent from November.

With highly-volatile food and energy components excluded, core prices rose 5.7 percent year-over-year, up 0.3 percent over the prior month. This was also precisely in line with market expectations.

Two- and ten-year bond yields moved slightly higher and equity indices slumped after the data hit the wires, generating strength in the dollar – but a round-trip is possible as market participants lock in gains against a relatively-unchanged outlook. Implied odds on a 50 basis point hike at the February Federal Reserve meeting are largely unmoved, and terminal rate expectations look relatively stable – while, perhaps more fundamentally, curves remain deeply inverted, suggesting that market participants expect inflation to fall and the central bank to go into easing mode by the end of the year.