Inflation cooled more than expected in January, delivering a rare piece of good news for consumers and bolstering hopes that interest rate relief could be on the way.
The consumer price index rose 2.4% from a year earlier, the Bureau of Labor Statistics reported Friday. That was down 0.3 percentage point from December and marked the lowest annual reading since May 2025.
Excluding volatile food and energy prices, core CPI increased 2.5% year over year. Economists surveyed by Dow Jones had projected a 2.5% annual gain for both the headline and core figures.
On a monthly basis, the all-items index rose a seasonally adjusted 0.2%, while core prices climbed 0.3%. Forecasters had expected 0.3% increases for both.
The softer-than-anticipated reading immediately rippled through markets. Treasury yields fell and traders increased their bets that the Federal Reserve could begin cutting rates as soon as June. According to the CME Group’s FedWatch tool, the odds of a June reduction jumped to roughly 83%.
“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.”
Shelter costs, which account for more than one-third of the CPI basket, rose just 0.2% in January. The annual increase in shelter slowed to 3%. While housing remains a major driver of overall inflation, the pace has clearly moderated.
Food prices ticked up 0.2%, with gains in five of the six major grocery categories. Energy prices fell 1.5% for the month. Vehicle costs were largely contained, with new cars rising 0.1% and used cars and trucks dropping 1.8%.
The latest numbers come after months of warnings that President Donald Trump’s tariff policies would reignite broad-based inflation. So far, the impact has been more targeted.
“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.
The annual inflation rate now stands at the same level seen shortly after Trump in April 2025 rolled out aggressive tariffs on U.S. imports, undercutting claims that the trade measures would automatically fuel runaway prices.
RELATED: NEW: Inflation Cools In April, Crushing Dems’ Trump Narrative
Still, the broader economic picture remains mixed.
The Atlanta Fed’s GDPNow tracker estimates fourth-quarter growth at a robust 3.7%, suggesting the economy ended 2025 on solid footing. But inflation remains above the Federal Reserve’s 2% target, and job creation has been sluggish. Employers added an average of just 15,000 jobs per month last year, raising concerns about labor market momentum.
Consumer spending held up through much of 2025 but unexpectedly flattened heading into the holiday season.
With conflicting signals, Fed officials are widely expected to hold rates steady for now after cutting three times in the latter half of 2025. The central bank faces a shifting leadership dynamic this year, including a more hawkish rotation of regional presidents and chair-designate Kevin Warsh, who is expected to favor lower rates.
Treasury Secretary Scott Bessent struck an optimistic tone this week, telling CNBC he sees an “investment boom” helping to drive growth as inflation returns to 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 CPI report was delayed by several days due to the partial government shutdown.
RELATED: End Of Government Shutdown Imminent As Speaker Johnson Clears Major Hurdle
While investors closely watch CPI, the Federal Reserve relies more heavily on the Commerce Department’s personal consumption expenditures price index as its preferred inflation gauge. The next PCE reading, covering December data, is scheduled for release Feb. 20.
For now, January’s numbers offer a glimmer of relief for households squeezed by years of rising prices — and fresh fuel for those betting that rate cuts could soon follow.
Download the FREE Trending Politics App to get the latest news FIRST >>
