U.S. consumer prices increased less than expected in January amid cheaper gasoline and a moderation in rental inflation, but households faced higher costs for services, suggesting little urgency for the Federal Reserve to resume cutting interest rates before summer.
The Consumer Price Index report from the Labor Department on Friday showed underlying inflation pressures warmed up last month, likely as businesses pushed through start-of-the-year price increases for goods and services, including personal care, recreation as well as airline fares and hospital services.
The slowdown in overall inflation was cheered by the White House, with a spokesperson posting on social media that “America’s economy is set to turbocharge even further through long-overdue interest rate cuts from the Fed.” Americans anxious about the labor market and affordability have soured on President Donald Trump’s handling of the economy.
The report followed on the heels of news this week of an acceleration in job growth in January and a drop in the unemployment rate to 4.3% from 4.4% in December.
“Overall, the data suggest that price pressures remain a little too hot for comfort for the time being, but the direction of travel for inflation continues to look to be lower, even if this has proved a bumpy and slow process,” said James McCann, senior economist, investment strategy at Edward Jones. “For the Fed, this probably doesn’t change much in the near term.”
The Consumer Price Index rose 0.2% last month after an unrevised 0.3% gain in December, the Labor Department’s Bureau of Labor Statistics said. Economists polled by Reuters had forecast the CPI increasing 0.3%. With January’s CPI report, the BLS published recalculated seasonal adjustment factors to reflect 2025 price movements.
The report was slightly delayed by last week’s three-day shutdown of the federal government. Some economists attributed January’s favorable headline reading to the volatility in the CPI data caused by last year’s longer shutdown that prevented the collection of prices for October.
The cost of shelter, which includes rents as well as motel and hotel rooms, increased 0.2% after surging 0.4% in December. Food prices rose 0.2% after accelerating 0.7% in the prior month. Grocery store prices climbed 0.2% as more expensive cereal and baked goods were partially offset by a 0.4% easing in the cost of beef and veal.
Eggs and coffee were also relatively cheaper last month as were fresh fruits and vegetables. The Trump administration has rolled back and cut tariffs on some imported foods. Still, food prices increased 2.9% from a year ago.
Consumers also got more relief at the pump, with gasoline prices dropping 3.2% in January from December. Though electricity prices dipped 0.1%, they surged 6.3% year-on-year, reflecting demand from data centers to power artificial intelligence.
In the 12 months through January, the CPI increased 2.4%. The slowdown in the year-on-year inflation rate from 2.7% in December mostly reflected last year’s higher readings dropping out of the calculation. The tamer inflation numbers were unlikely to resonate with consumers.
“The primary explanation for the gap is that households focus on the price level while inflation measures the price change, but a secondary one is the behavior of household essentials,” said Eric Winograd, chief economist at AllianceBernstein. “Food, medicine and rent prices are rising faster than the series as a whole, and those prices are more important to households than the overall basket.”
Financial markets raised the odds of a June rate cut. The Fed last month left its benchmark overnight interest rate in the 3.50%-3.75% range. Stocks on Wall Street were trading lower amid a technology sector rout. The dollar gained versus a basket of currencies. U.S. Treasury yields fell.
Core inflation was warmer in January
Excluding the volatile food and energy components, the CPI increased 0.3% after rising by an unrevised 0.2% in December. Part of the rise in the so-called core CPI likely reflected one-off turn-of-the-year price increases, which economists said were still not being fully accounted for by the seasonal adjustment factors, the model used by the BLS to strip out seasonal fluctuations from the data.
The cost of personal care jumped 1.2%, while recreation increased 0.5% and communication rose 0.5%. The pass-through from tariffs persisted, though it was mild. Apparel prices advanced 0.3%, while the cost of household furnishings and supplies increased 0.3%.
Prescription medication prices were unchanged. A 1.8% plunge in the prices of used cars and trucks helped to keep core goods prices flat for a second straight month. Core goods prices excluding autos increased 0.4%, the most since February 2023.
The cost of services excluding energy rose 0.4% after climbing 0.3% in December. Services were boosted by a 6.5% surge in airline fares. Healthcare costs increased 0.3%, with prices for hospital services shooting up 0.9% and physicians’ services rising 0.3%. Owners’ equivalent rent increased 0.2% after gaining 0.3% in December.
There were also increases in the prices of recreation services, haircuts as well as education and communication services. But motor vehicle insurance prices fell.
In the 12 months through January, the so-called core CPI increased 2.5%. That was the smallest gain since March 2021 and followed a 2.6% advance in December. That also reflected last year’s higher readings dropping out of the calculation.
The Fed tracks the Personal Consumption Expenditures Price Indexes for its 2% inflation target. Both measures are running well above target. Based on the CPI data, economists’ estimates for the January increase in core PCE inflation ranged from 0.2% to 0.5%. Year-on-year estimates for January core PCE inflation were between an increase of 2.9% and 3.2%. The government will publish December PCE inflation data next week.
Economists expect inflation to pick up for a while this year, citing the pass-through from import duties as well as the dollar’s depreciation last year against the currencies of the United States’ main trade partners. The trade-weighted U.S. dollar fell about 7.4% last year.
“We expect inflation to remain somewhat sticky in the first half of the year,” said Lydia Boussour, senior economist at EY-Parthenon. “The downward bias to CPI inflation created by the data-collection gap during the government shutdown will continue to distort the data through April.”
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)
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