U.S. Inflation continued its downward trend in January, easing to ’s 2.4% annual rate, according to data released , by the Labor Department. The figure represents a deceleration from ’s 2.7% and fell slightly below expectations. Core inflation, which excludes the more volatile food and energy sectors, also moderated, decreasing to 2.5% – in line with forecasts.
The January Consumer Price Index (CPI) report arrives after a brief government shutdown delayed its release by two days. While the data offers a welcome sign of cooling price pressures, economists caution against interpreting it as a definitive return to the Federal Reserve’s 2% target. The slowdown follows a period of elevated inflation and the impact of broad tariffs imposed by President Donald Trump last year.
“The January Consumer Price Index delivered a welcome surprise to start the year,” said Bernard Yaros, Lead Economist at Oxford Economics. He noted that recent years have seen upside surprises in January due to seasonal factors and delayed price adjustments, but these were less pronounced this time, reinforcing the view that tariff-induced price increases on goods are largely behind us.
On a monthly basis, prices increased 0.2%, a decrease from the 0.3% rise recorded in . The moderation was driven by declines in energy prices, which fell 1.5%, and smaller increases in the cost of shelter and food.
The report indicated a 0.2% increase in food prices month-over-month, a slower pace than the 0.6% increase seen in . Gasoline prices experienced a more significant drop, falling 3.2% in , marking the third decrease in the past four months and a 7.5% decline year-over-year.
However, certain sectors experienced price increases. Airline fares, personal care products, recreation, and medical care all saw upward movement during the month. Conversely, the cost of used cars and trucks, household furnishings, and motor vehicle insurance declined.
A notable decline was observed in used vehicle prices, which fell 1.8% month-over-month. The report suggests limited evidence of further increases stemming from the tariffs, with prices for new vehicles rising only 0.1% and clothing remaining unchanged.
Specific price movements included a 4.5% increase in monthly subscriptions to music streaming services and a 2% rise in the cost of tobacco. Rental costs increased by a modest 0.25%.
Services continued to contribute to inflationary pressures, with underlying services prices (excluding energy) increasing 0.38% month-over-month. This was partially offset by stable prices for durable goods.
Despite the encouraging CPI data, the strong labor market continues to complicate the path for potential interest rate cuts by the Federal Reserve. Recent employment figures revealed a robust job market in , diminishing hopes for a rate reduction in and pushing market expectations towards .
Currently, the market anticipates two 25-basis-point rate cuts this year, with a 50% probability of a third reduction. The benign inflation data supports this outlook, though economists emphasize that the Federal Reserve will likely remain cautious and data-dependent.
Looking ahead, Paul Ashworth, an economist at Capital Economics, anticipates that strong productivity growth will help to moderate the increase in labor unit costs, leading to a further slowdown in core services inflation. However, he cautioned against premature celebration, noting that the Fed’s preferred measure of inflation, the Personal Consumption Expenditures (PCE) price index, likely rose to 3% in .
Bernd Weidensteiner, an economist at Commerzbank, characterized the report as “quite convenient” for the Federal Reserve. He noted that the feared price surge in did not materialize, and the impact of tariffs on inflation remains limited. He expects the Fed to hold steady on interest rates for the next two meetings, but forecasts four rate cuts starting in , exceeding current market expectations.
The latest inflation data suggests that the disinflationary trend is continuing, albeit at a relatively slow pace. This supports the view that the impact of tariffs on prices is likely to be temporary, a perspective shared by some Federal Reserve officials. As the economy evolves, the incoming data will be crucial in guiding the Federal Reserve’s monetary policy decisions.
