The conflicting inflation report

• Financial markets are celebrating because they see softer underlying inflation.
• But consumers likely didn't feel that cooling much at all. Prices shot higher for gasoline and other energy sources, and for eggs and many other groceries.

What they're saying: "Core inflation rising less than expected may portend good news for inflation in the months ahead, but this was a particularly painful report for consumers," Robert Frick, an economist at Navy Federal Credit Union, wrote in a note.

• "The cost of necessities that hurt household budgets, especially for lower-income Americans, were among the top reasons inflation rose in December," Frick added.

By the numbers: CPI rose by 0.4% last month, the second straight monthly increase. In the 12 months through December, CPI increased 2.9%, up from 2.7% in November.

• Among the culprits: higher prices for gasoline and some grocery staples, like eggs. Energy prices rose 2.6% in December alone, accounting for 40% of the monthly increase in CPI.
• Overall grocery prices ticked down, but that disguises sharp increases for everyday foods. Egg prices were up 3.2% in December and up 36.8% over a year ago.
• Airfares were up 3.9% in December, and rose 7.9% over the last 12 months.

The other side: The inflation picture brightens a bit once energy and food prices are excluded. That core measure makes little sense for consumers, but economists watch it for clues about underlying inflation.

• Core inflation rose 0.2% last month, the slowest pace since last summer. For the 12 months ending in December, core CPI was 3.2% — a leg down after moving sideways in recent months.
• Shelter costs — a key category keeping inflation elevated — rose just 0.3% for the second straight month, a sign that price pressures might be normalizing.
• Over the last three months, core CPI rose 3.3% on an annualized basis, down from 3.7% in November.

"The Federal Reserve is ok with watching the headline CPI go up temporarily if that increase does not spill over into the core CPI, and this is what happened in December," Eugenio Aleman, chief economist at Raymond James, wrote in a note.

The Fed is likely to take the new CPI reading, paired with Tuesday's Producer Price Index, as evidence that it is continuing to progress toward its inflation goals.

State of play: The S&P 500 was up 1.6% as of late morning, as the yield on 10-year Treasury notes plunged a whopping 0.14 percentage points to 4.64%.

• Markets, at least, anticipate the Fed will look through the food and energy price spikes — which are driven by factors beyond the control of monetary policy — and see reason for greater comfort in cutting interest rates again before too long.
• A rate cut at the Fed's policy meeting that concludes Jan. 29 looks unlikely, but the new data supports the idea of further reductions in borrowing costs later in the year.
• CME's FedWatch tool, based on futures prices, on Wednesday put the odds of at least one rate cut by June at 66%, up from 58% the day before.

The intrigue: At the last Fed press conference, chair Jerome Powell was asked whether a tick down in core inflation would count as progress even if the overall inflation measure goes up — the exact scenario in Wednesday's CPI data.

• "People don't experience core inflation; they experience inflation, and that includes food and energy costs. So that's the overall goal," Powell said last month.
• He added: "[H]eadline inflation contains energy and food, and those prices can fluctuate for reasons that are not related to tightness in the economy and therefore are not really good predictors of future inflation."