January’s inflation report showed broad-based cooling, with headline CPI at 2.4% and core at 2.5%, strengthening market expectations for a Federal Reserve rate cut as early as June.
U.S. inflation cooled more than expected in January, delivering a welcome data point for policymakers and investors navigating a delicate balance between resilient economic growth and lingering price pressures.
The consumer price index rose 2.4% from a year earlier, down from 2.7% in December, according to the Bureau of Labor Statistics. The reading returned inflation to levels seen shortly after President Donald Trump announced sweeping tariffs on imports in April 2025.
Core CPI, which strips out food and energy, increased 2.5% year over year, the lowest since April 2021. Economists surveyed by Dow Jones had expected 2.5% for both headline and core measures.
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Every month, headline CPI rose 0.2% while core increased 0.3%, slightly below forecasts for the overall index.
Financial markets reacted with measured optimism. Treasury yields fell, and traders in interest-rate futures increased the probability of a June rate cut to about 83%, according to CME Group data. Stock futures were little changed.
Broad Cooling Across Key Categories
The January data pointed to easing pressures in several categories central to household budgets.
Shelter costs, which account for more than one-third of the CPI weighting, rose 0.2% for the month. The annual increase slowed to 3%, helping drive the overall deceleration. Rent moderation is particularly significant because housing inflation has been one of the most persistent components in recent years.
Energy prices declined 1.5% in January. Vehicle prices were subdued, with new vehicles up 0.1% and used cars and trucks falling 1.8%. Food prices rose 0.2%, with most grocery categories posting modest gains.
Airline fares jumped 6.5%, illustrating ongoing volatility in travel pricing. Egg prices fell 7% and are down 34% from a year earlier following a sharp surge tied to supply disruptions.
Heather Long, chief economist at Navy Federal Credit Union, called the report “great news on inflation,” adding that cooling in food, gas, and rent “will provide much needed relief for middle-class and moderate-income families.”
Economists had expected President Trump’s tariffs to generate broader price increases. Instead, impacts appear concentrated in specific goods such as furniture and appliances rather than across the broader consumer basket.
Growth Holds Firm as Labor Market Softens
The inflation report adds to a mixed macroeconomic picture.
Economic growth has remained solid. The Federal Reserve Bank of Atlanta’s GDPNow tracker estimates fourth-quarter growth at 3.7%, suggesting momentum carried into early 2026.
At the same time, the labor market has shown signs of cooling. The U.S. added an average of 15,000 jobs per month last year, a marked slowdown from prior years. Consumer spending held up through most of 2025 but was unexpectedly flat heading into the holiday season, raising questions about household momentum.
Treasury Secretary Scott Bessent said Friday that he sees an “investment boom” supporting growth while inflation moves back toward the Federal Reserve’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.”
The interplay between moderating inflation and slower job creation presents policymakers with competing priorities: sustain expansion without allowing price pressures to reaccelerate.
Policy Outlook and Fed Crosscurrents
The Federal Reserve does not use CPI as its primary inflation gauge, instead focusing more closely on the Commerce Department’s personal consumption expenditures index. Even so, CPI trends heavily influence market expectations.
Inflation remains above the Fed’s 2% target, but the trajectory has improved. With three rate cuts already delivered in late 2025, the central bank is widely expected to remain on hold until at least June.
The policy environment is further shaped by leadership dynamics. A rotating group of regional Federal Reserve presidents is seen as maintaining a firm stance on inflation control, while chair-designate Kevin Warsh is expected to advocate for lower rates.
January’s CPI report, delayed several days because of a partial government shutdown, does not resolve the debate. It does, however, reinforce the view that price pressures are easing without a sharp deterioration in growth — a combination that could give the central bank room to pivot toward additional easing later this year if the trend continues.
For markets and policymakers, the question now is whether January marks a sustained downshift in inflation or another temporary reprieve in a still-fragile disinflation process.