The US Consumer Price Index excluding food and energy rose 2.5% year on year in January. This matched the forecast of 2.5%.
The data suggests underlying inflation held steady at the expected pace. The release reported no difference between the actual reading and the market estimate.
Implications For Fed Policy And Volatility
The January core inflation number coming in at 2.5% year-over-year was exactly what the market priced in, removing a key risk for the coming weeks. This lack of surprise suggests the Federal Reserve has no new reason to alter its current wait-and-see stance on interest rates. We should therefore expect implied volatility in equity index options, as measured by the VIX, to decline from the elevated levels seen in late 2025, possibly settling into the 13-15 range.
With lower expected market swings, selling options premium becomes a more viable strategy. Look to strategies like iron condors on the S&P 500 that profit from the index remaining within a defined range. After last year’s battle to bring inflation down from above 3%, this period of stability offers a clear window for income-focused trades that benefit from time decay.
This inflation reading also solidifies the outlook for interest rate derivatives, with Fed Funds futures now fully pricing in a hold at the next policy meeting. The CME’s FedWatch tool almost certainly shows a greater than 90% probability of rates remaining unchanged, leaving little room for speculative bets on a near-term surprise. The focus for rate traders will now shift further out to the summer meetings, trying to pinpoint the start of a potential easing cycle.
Key Risk From Upcoming Employment Data
Our immediate attention must now turn to the next set of employment figures, as a surprisingly strong jobs or wage number could easily reignite inflation fears. While this CPI report gives us a green light for now, we must remember how quickly the narrative shifted following strong labor data back in the third quarter of 2025. Any positions established now should be managed with an eye on the next major economic releases.
