The cost of goods and services rose at a slower annual rate than expected in January, providing hope that the nagging U.S. inflation problem could be starting to ease.
The consumer price index for January accelerated 2.4% from the same time a year ago, down 0.3 percentage point from the prior month, the Bureau of Labor Statistics reported Friday. That pulled the inflation rate down to where it was the month after President Donald Trump in April 2025 announced aggressive tariffs on U.S. imports.
Excluding food and energy, the core CPI was up 2.5%, the lowest level since April 2021. Economists surveyed by Dow Jones had been looking for an annual rate of 2.5% for both readings.
On a monthly basis, the all-items index was up a seasonally adjusted 0.2% while core gained 0.3%. The forecast had been 0.3% for both.
Though the category accounted for much of the CPI gain, shelter costs rose just 0.2% for the month, bringing the annual increase down to 3%. Shelter makes up more than one-third of the CPI.
Elsewhere, food prices increased 0.2% as five of the six major grocery group categories posted gains. Energy fell 1.5% while vehicle prices also were muted, with new vehicles up just 0.1% and used cars and trucks falling 1.8%. Airline fares jumped 6.5% while egg prices fell 7% and are now down 34% over the past year after a meteoric surge.
Stock market futures were little changed after the report while Treasury yields moved lower.
“This is great news on inflation,” said Heather Long, chief economist at Navy Federal Credit Union. “Inflation fell to the lowest level since May and key items such as food, gas and rent are cooling off. This will provide much needed relief for middle class and moderate-income families.”
The lower-than-expected reading helped boost the outlook for Federal Reserve interest rate cuts in the futures market. Traders raised the odds for a reduction in June to about 83%, according to the CME Group’s FedWatch tool.
The report adds to a mixed economic picture.
At the macro level, the U.S. shrugged off a slow start in 2025 and has been barreling forward since, with fourth-quarter growth pegged at 3.7%, according to the latest update from the Atlanta Fed’s GDPNow, a running tracker of incoming data.
But inflation has continued to hold above the Fed’s 2% annual target even with generally contained energy prices. Moreover, Fed officials continue to express concern about the labor market, which added only 15,000 jobs a month last year. Consumer spending held up fairly well last year, though it was unexpectedly flat heading into the holiday season.
Economists had expected Trump’s tariffs to spark inflation, but the impact has been largely tilted toward select goods rather than a broader impact.
“The tariffs have had a clear impact on products such as furniture and appliances, but the key items in many family budgets are cooling off,” Long added.
With the conflicting economic signals, the Fed is widely expected to stay on hold until June after a rate-cutting cycle that saw three reductions in the latter part of 2025. The central bank faces shifting dynamics this year, with a rotating cast of regional presidents that seems titled toward a more aggressive posture on fighting inflation and a chair-designate, Kevin Warsh, who is likely to push for lower rates.
Treasury Secretary Scott Bessent on Friday told CNBC that he sees an “investment boom” acting as a tailwind while inflation gets back to the Fed’s target “in the middle of this year.”
“We’ve got to get away from this idea that growth automatically has to be tampered down, because growth, per se, is not inflationary.” Bessent added. “It’s growth that leaks into areas where there’s not sufficient supply, and everything this administration is doing is creating more supply.”
The January inflation report was delayed a few days because of the partial government shutdown.
The Fed does not use the CPI as its primary inflation measure. Instead, it more closely watches the Commerce Department’s personal consumption expenditures price index, the December reading of which will be released Feb. 20.