The mood has shifted. Inflation is not the only threat people talk about now. Yet the unease is still there.

In the December 2025 CPI report, the all items index was up 2.7 percent over the prior year. Core CPI, which strips out food and energy, was up 2.6 percent. Those numbers sound calmer than the past few years.

But calm inflation does not always mean a calm market. Once prices stop rising as fast, the next question shows up fast too. If inflation is cooling, is demand cooling even faster

That is the seed of a deflation scare. It is often less about prices falling today and more about growth slipping tomorrow.

Rate moves do not hit the economy all at once. They work slowly, then all over.

Borrowers refinance at higher costs. Monthly payments rise. Firms delay hiring. Some buyers step back. By the time inflation looks better, the slowdown can already be building under the surface.

Policy is still on the tight side. On December 10, 2025, the Fed set the target range for the federal funds rate at 3.5 to 3.75 percent. A rate can be lower than its peak and still be restrictive if growth is fading.

This is where cycles can overshoot. The same force that cools prices can also cool jobs and credit. And markets tend to notice those shifts early.

A past cycle shows the pattern in a sharp way.

In mid 2008, inflation looked hot. The CPI release for July 2008 shows a 12 month rise that was still very high. Yet within months, the story flipped from “prices are the problem” to “demand is the problem.”

By December 2008, CPI fell 1.0 percent in that month, and the index was only 0.1 percent higher than a year earlier. The economy was already in recession by then, with the peak dated to December 2007 and the trough later dated to June 2009.

The point is not that today is 2008. The point is the sequence. Inflation fear can fade, and then demand fear can take its place, sometimes quickly.

Markets trade on change, not just levels.

When inflation is high but falling, rates markets can start pricing “less inflation risk.” Then, as growth momentum softens, the same markets can start pricing “more slowdown risk.” This can happen even while CPI is still positive and unemployment is still low.

That is why the story can turn ahead of the headlines. The data is backward looking. Prices move on what seems likely next.

You can see the early shape of this in jobs. In December 2025, nonfarm payrolls were up 50,000 and the unemployment rate was 4.4 percent. Weekly claims remain low too. For the week ending January 17, 2026, initial claims were 200,000.

None of that screams “crash.” But it can still fit a late cycle feel, where hiring is slower and confidence is thinner.

This is the backdrop the market inherited.

Credit is one place where restraint shows up early. In the Fed’s consumer credit report for November 2025, revolving credit fell at a 1.9 percent annual rate. That is a small number, but it lines up with a more careful household.

Delinquencies are another early stress check. The delinquency rate on credit card loans at all commercial banks was 2.98 percent in Q3 2025. That is not a crisis level by itself, but it is a signal investors watch when rates stay high.

Banks also said credit standards were tighter for business loans in the third quarter, in the Fed’s October 2025 loan officer survey. Tighter credit does not guarantee a downturn, but it can help explain why growth can cool faster than expected.

On the consumer side, sentiment remains soft. The University of Michigan noted that sentiment has improved a bit recently but is still well below a year ago, with consumers focused on high prices and a softer labor market.

Put that together and you get the current mood. Disinflation is arriving, but anxiety is not leaving. It is shifting from prices to demand.

Markets trade on change, not just levels.

There are two broad paths markets tend to weigh in this phase.

One path is benign disinflation. Prices cool, growth slows but stays positive, and jobs soften without breaking. In that world, the fear fades as the cycle rebalances.

The other path is a sharper air pocket. Demand weakens more than expected. Credit tightens further. Hiring slows more. In that world, the deflation scare is not really about CPI going negative next month. It is about the economy losing speed.

And the first signs usually show up in credit and jobs before they show up in CPI. That is why this scare can appear “after inflation,” not during it.

In market cycles, the story often changes first. The data follows. The challenge for investors is not the level of today’s inflation print. It is the direction of the next few steps.