Shoppers in the SoHo neighborhood of New York. Photographer: Michael Nagle/Bloomberg
U.S. inflation was fairly mild at the start of the year, defying concerns for a bigger jump and boosting expectations that the Federal Reserve will deliver more interest rate cuts.
The consumer price index (CPI) rose 0.2 percent in January, the smallest gain since July and restrained by lower energy costs, according to Bureau of Labor Statistics (BLS) data out Friday. An underlying metric known as the core CPI, which excludes food and energy, advanced as expected from a month earlier.
January inflation readings have been strong in recent years, often exceeding expectations, as companies tend to raise their prices at the start of the year. Many economists had called for an even bigger pickup last month in the core CPI for that reason, as well as predictions that firms would pass along more tariff-related costs to consumers.
Although services costs picked up last month, prices of core goods remained stable. The core CPI rose from a year ago by the least since 2021. The overall gauge also eased on an annual basis.
Markets rallied in relief, as the core figure was relatively tame and came in line with the median projection. Treasury yields fell and the S&P 500 fluctuated, while traders boosted bets for the Federal Reserve to cut interest rates three times this year.
| Metric | Actual | Estimate |
|---|---|---|
| CPI month-over-month | +0.2% | +0.3% |
| Core CPI month-over-month | +0.3% | +0.3% |
| CPI year-over-year | +2.4% | +2.5% |
| Core CPI year-over-year | +2.5% | +2.5% |
Alongside recent indications of a stabilizing labor market, Fed officials will likely want to see further inflation progress before lowering interest rates.
"On balance, we found today's report to be encouraging," Wells Fargo & Co. economists said in a note. "Tariff-induced price hikes probably have not fully worked their way through the data, but we are closer to the end than the beginning of this source of higher prices."
The slight pickup in underlying inflation from a month earlier reflected higher prices for airline fares, personal care, recreational goods, medical care, and communications. However, prices of used cars and trucks, household furnishings, and auto insurance decreased last month.
Americans did see some relief on the costs of everyday purchases as electricity prices ebbed and gasoline prices dropped by the most in nearly a year. Grocery prices rose the least since July.
.What Bloomberg economists say..."If January's CPI had came in hot, we would have cautioned against taking it too literally—but the fact that the January report was so tepid relative to a typical January is somewhat of a signal. ... We expect disinflationary pressure to dominate in the next few months, and expect the Fed to cut rates by 100 bps [basis points] this year."— Anna Wong & Troy Durie |
Services prices, excluding energy, rose 0.4 percent, the most since July. Airfares climbed by the most since mid-2022, while other categories like auto rentals and parking costs also jumped. Another services gauge closely tracked by the Fed, which strips out housing and energy costs, increased by the most in a year.
Meanwhile, the CPI report showed goods prices excluding food and energy were unchanged for a second month. Used-car prices declined by the most in two years, while the cost of new vehicles rose only slightly. Still, core goods prices excluding used vehicles rose by the most in nearly three years.
One of the key drivers of inflation in recent years has been housing costs — the largest category within services. Shelter prices rose 0.2 percent, the smallest increase since September. Key housing metrics were tame, and the cost of hotel stays declined.
Central bankers also pay close attention to wage growth because it can help inform expectations for consumer spending—the main engine of the economy. A separate report Friday that combines the inflation figures with recent wage data showed that real average hourly earnings climbed 1.2 percent from a year ago. Growth in inflation-adjusted average weekly earnings accelerated to 1.9 percent, the strongest in nearly five years.
With the latest data, the BLS also incorporated new seasonal adjustment factors, with the previous five years' of data subject to revision. The agency also adjusts the weights of the individual price categories that make up the CPI.
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