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- January inflation came in softer than expected, reinforcing the view that price pressures are continuing to ease toward the Fed’s 2% target.
- Energy was the main driver of the slowdown, with food and shelter also showing mild cooling.
- Markets leaned further into the rate-cut narrative, pricing in a potential June move, though the outlook remains clouded by upcoming Fed leadership changes.
In January, the US saw a slowdown in inflation, giving consumers hope that rising prices may finally be under control.
The latest report showed that prices are growing at a slower pace than expected. This indicates good news for the Federal Reserve, which could reinforce expectations of more rate cuts this year.
Breaking Down the Report
Headline CPI came in at 2.4% YoY, down 0.3% from the previous report and reaching its lowest level since May of last year. Core inflation matched expectations, coming in at 2.5% and reached its lowest level since April 2021. On a monthly basis, overall prices rose 0.2% while core prices increased 0.3%. Both numbers came in below what economists expected. ⁽¹⁾
US CPI YoY / Source: Trading Economics
US Core CPI YoY / Source: Trading Economics
What Drove Price Changes?
Several categories showed important changes in January.
Price pressures eased notably in the energy sector, with prices falling 0.1% after a 2.3% rise in December, driven by sharp declines in gasoline and fuel oil.
Natural gas prices rose at a slower pace, while used car prices fell. Inflation also moderated for shelter and food, signaling broader cooling in price pressures. ⁽²⁾
Impact on Interest Rates
The lower-than-expected inflation reading has reinforced expectations for rate cuts from the Federal Reserve, with traders pricing in a 51.8% chance of a rate cut in June. ⁽³⁾
The Federal Reserve is widely expected to keep rates unchanged until June. The central bank cut rates three times in late 2025 but has paused since then.
💡 Did you know?
A single percentage point change in interest rates can add or save the average American household thousands of dollars annually across mortgages, car loans, and credit card, causing Fed decisions directly impact consumers.
Is the Economy Finally Seeing Hope?
The US economy remains resilient, with Q4 GDP estimated to grow at 3.7% QoQ. But the surprise in data came from January’s labor market report. ⁽⁴⁾
The labor market has been a concern for Fed officials. Last year, the economy added only 15,000 jobs per month on average. However, January brought a positive surprise.
The US economy added 130,000 jobs, far exceeding expectations of 70,000 and marking a huge improvement from December’s 48,000 jobs. The unemployment rate also improved to 4.3%, beating the forecast of 4.4%. ⁽⁵⁾
Inflation remains above the Fed’s 2% target, even with controlled energy prices.
Economists expected President Trump’s tariffs to increase inflation. However, the impact has mainly affected specific goods rather than causing widespread price increases across the economy.
Trump announced aggressive tariffs on US imports in April 2025. The January inflation rate matches the level seen in May after those tariffs were announced.
Federal Reserve Leadership Changes
The Federal Reserve faces important changes this year. Fed Chair Jerome Powell’s term ends in May, and President Trump has nominated Kevin Warsh to replace him.
Warsh’s views on policy remain unclear. His earlier writings suggest he prefers tighter monetary policy. However, recent statements point out that he may favor cutting interest rates. He has also expressed optimism that AI-driven productivity could help reduce inflation. ⁽⁶⁾
What Economists Expect
Economists have a list of predictions, showing that either:
- The Fed will keep rates steady through May when Powell’s term ends
- The Fed will cut rates immediately afterward in June
- Rates will be cut to 3.50% by the end of next quarter
- The Fed will cut rates twice this year under Warsh
However, nearly half of the economists surveyed said Warsh is likely to set policy too loose rather than too tight. This could be risky if it happens while the government is spending more money.
“If the Fed continues to cut, those rate cuts will come at a time when we should have more expansionary fiscal policy than we did last year. It could be a recipe for overdoing it,” said Stephen Juneau, US economist at Bank of America. ⁽⁷⁾
Government’s View
Treasury Secretary Scott Bessent said on Friday that he sees an “investment boom” helping the economy. He believes inflation will return to the Fed’s 2% 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 said. “It’s growth that leaks into areas where there’s not sufficient supply, and everything this administration is doing is creating more supply.” ⁽⁸⁾
What’s Next?
The Fed does not consider CPI as its main inflation measure. Instead, it watches the personal consumption expenditures (PCE) price index more closely. The December PCE reading will be released on February 20.
The January inflation report was delayed by a few days because of a partial government shutdown. Economists will be watching closely in the coming months to see if inflation continues to fall and how the Federal Reserve responds under its new leadership.
