[BUG] settings.json: Incorrect variable expansion

Preflight Checklist

• [x] I have searched existing issues and this hasn't been reported yet
• [x] This is a single bug report (please file separate reports for different bugs)
• [x] I am using the latest version of Claude Code

What's Wrong?

When setting the $PATH environment variable in the env-key in settings.json it gets both expanded and appended. So having the following .claude/settings.json in a project:

// <project_dir>/.claude/settings.json
{
  "env": {
    "PATH": "/home/user/bin:$PATH"
  }
}

will result in something like (inside the Claude Code bash environment):

  ● Bash(echo $PATH)
  ⎿ /home/user/bin:/home/user/.local/bin:/home/user/bin:$PATH:/snap/bin

To further enlighten us, if we set:

// <project_dir>/.claude/settings.json
{
  "env": {
    "PATH": "/home/user/bin:{$PATH}"
  }
}

it becomes:

● Bash(echo "$PATH")
  ⎿ /home/user/bin:{/home/user/.local/bin:/home/user/bin:{$PATH}:/snap/bin}

So obviously, some weird incorrect expansion is happening.

What Should Happen?

We should end with something like:

● Bash(echo "$PATH")
  ⎿ /home/user/bin:/home/user/.local/bin:/home/user/bin:/snap/bin}

Error Messages/Logs

Steps to Reproduce

1. Put the following in your project .claude/settings.json:

{
  "env": {
    "PATH": "/home/user/bin:$PATH"
  }
}

1. Ask Claude Code to print the $PATH environment variable.

Claude Model

None

Is this a regression?

I don't know

Last Working Version

_No response_

Claude Code Version

2.1.22 (Claude Code)

Platform

Anthropic API

Operating System

macOS

Terminal/Shell

Terminal.app (macOS)

Additional Information

_No response_