The cost of goods and services rose at a slower annual rate than expected in January, raising hopes that America’s nagging inflation problem may be starting to ease.
The Bureau of Labor Statistics released Friday’s consumer price index for January, which rose 2.4% from the same month a year ago and was down 0.3 percentage points from the previous month. This brought inflation down to levels seen the month after President Donald Trump announced aggressive tariffs on U.S. imports in April 2025.
Core CPI, which excludes food and energy, rose 2.5%. Economists surveyed by Dow Jones had expected annual growth rates of 2.5% on both measures.
On a monthly basis, the All Index rose by a seasonally adjusted 0.2%, while the Core Index rose by 0.3%. The forecast for both was 0.3%.
While this category accounted for most of the CPI increase, shelter costs rose only 0.2% over the month, for an annual increase of 3%. Shelters account for more than a third of CPI.
Elsewhere, food prices increased by 0.2%, with five of the six major food group categories increasing. Energy prices fell 1.5%, but vehicle prices also slumped, with new cars rising only 0.1% but used cars and trucks falling 1.8%.
Stock market futures were little changed after the news, and U.S. Treasury yields fell.
“This is great news regarding inflation,” said Heather Long, chief economist at Navy Federal Credit Union. “Inflation has fallen to its lowest level since May, and staples like food, gas and rent have cooled. This will provide much-needed relief to middle-class and middle-income households.”
The weaker-than-expected rate boosted expectations in the futures market that the Federal Reserve would cut interest rates. Traders have raised the probability of a rate cut in June to about 83%, according to CME Group’s FedWatch tool.
The report further highlights the complex economic picture.
On a macro level, the U.S. has emerged from a weak start in 2025 and has been growing steadily since then, with fourth-quarter growth pegged at 3.7%, according to the latest update from the Atlanta Fed’s GDPNow (tracking data received).
But even with energy prices largely under control, inflation remains above the Fed’s annual target of 2%. Additionally, Fed officials continue to express concerns about a labor market that added only 15,000 jobs per month last year. Consumer spending last year remained fairly strong, although it unexpectedly leveled off in the run-up to the holiday season.
Economists expected President Trump’s tariffs to cause inflation, but the impact would be primarily on a few products rather than having a broad impact.
“Tariffs have had a clear impact on products such as furniture and appliances, but key items in many household budgets have cooled,” Long added.
Given the conflicting economic signals, the Fed is widely expected to keep policy unchanged until June, following a cycle of three rate cuts in the second half of 2025. The Fed faces a changing landscape this year, with a rotation of regional presidents taking a more aggressive stance on combating inflation, and Kevin Warsh, the Fed’s new chairman, likely to push for rate cuts.
Treasury Secretary Scott Bessent told CNBC on Thursday that he expects an “investment boom” to help bring inflation back to the Fed’s target by “the middle of this year.”
“We have to move away from the idea that growth must automatically be suppressed because growth itself is not inflation,” Bessent added. “Growth is seeping into areas that don’t have enough supply, and everything this administration is doing is creating more supply.”
January’s inflation report was delayed by several days due to the partial government shutdown.
The Fed does not use the CPI as its primary inflation measure. Instead, it is monitoring more closely the Commerce Department’s Personal Consumption Expenditure Price Index, whose December reading is expected to be released on February 20th.
