Stocks will plunge 3% on Thursday if December inflation comes in higher than expected, JPMorgan says

• Thursday's CPI report could jolt markets in a big way, according to a note from JPMorgan.
• The bank said the S&P 500 could plunge as much as 3% if inflation is higher than expected.
• JPMorgan said the most likely scenario is for inflation to come in around consensus estimates, which would lead to a 2% surge in stocks.

The December consumer price index report is going to jolt markets in a big way when it's released this Thursday, according to a Tuesday note from JPMorgan.

The bank said it expects a big move in stock prices in either direction, depending on whether the inflation report is higher or lower than expected.

Based on consensus estimates, the market current expects headline inflation to come in at 6.5% year-over-year, and for core inflation to be 5.7% year-over-year. On a month-over-month basis, headline and core inflation are expected to be -0.1% and 0.3%, respectively.

The most likely scenario with a 65% chance of happening, according to JPMorgan, is the December CPI report revealing headline inflation of between 6.4% and 6.6%, year-over-year. In that scenario, JPMorgan expects a bullish move from the S&P 500 with a gain of between 1.5% and 2%.

"This is a bullish outcome and think this outcome produces a decline in vol asset classes, finds support from both bonds and the US dollar," JPMorgan said. The bank added that any initial surge higher in the S&P 500 is likely to be faded throughout the day.

The next most likely scenario with a 20% chance of happening is the CPI report printing headline inflation below 6.4%. That scenario would signal to investors that inflation is decidedly moving in the right direction, and JPMorgan expects a S&P 500 bounce of between 3% and 3.5%. The gains could get even larger if the CPI print is below 6.2%, as it would trigger a tail event with increased volatility.

The least likely scenario with a 15% chance of happening is the CPI report showing inflation was above 6.6% in December. Such a scenario would send the S&P 500 falling between 2.5% and 3%, while an inflation print above 6.8% could spark even bigger losses, as it too would represent a tail event that could catch a lot of investors on the wrong side of the trade.

Increased market volatility stemming from CPI reports is nothing new to investors. Multiple CPI reports over the past year have sparked big upside and downside moves in stock prices as investors attempt to gauge whether more rate hikes from the Fed are likely.

November's CPI report showed inflation cooling faster than expected, which led to an immediate 3% gain for stocks. Those gains faded throughout the day on December 13, and stocks went on to fall 5% over the next four days.