In January, U.S. consumer price increases moderated more than expected, approaching the Federal Reserve’s 2% target, largely due to a decline in energy prices. Headline U.S. consumer prices increased by 2.4% in the twelve months leading up to January, falling short of estimates of 2.5% and down from December’s rate of 2.7%. On a monthly basis, the Labor Department’s consumer price index – a key gauge of U.S. inflation – increased by 0.2%, contrasting with economists’ expectations that it would align with December’s rate of 0.3%. The monthly increase was largely driven by a rise in shelter and food costs, although this was somewhat mitigated by a decline in energy prices, according to the reports. Excluding the more volatile categories of food and fuel, the “core” CPI experienced a year-on-year increase of 2.5% and a month-on-month rise of 0.3%, aligning with expectations. This uptick was driven by increased costs in services such as air travel and medical care, which were offset by declines in prices for used cars and trucks, household furnishings, and motor vehicle insurance.

In December, the core figures were recorded at 2.6% and 0.2%, respectively. It has been noted by observers that companies generally increase their prices at the start of the year after the holiday shopping period. However, these hikes “weren’t significant factors” in January’s CPI, noted Paul Ashworth. The inflation reading, slightly delayed due to a recent temporary federal government shutdown, follows a robust labor market report on Wednesday that indicated a cooling unemployment rate and nonfarm payrolls growth significantly surpassing expectations. Federal Reserve policymakers are expected to consider both the inflation and employment reports as they assess the future trajectory of interest rates. In the previous month, the Federal Reserve maintained interest rates within a range of 3.5% to 3.75%, attributing this decision to a stabilizing employment landscape and persistent, though steady, inflationary pressures.

In 2025, the Fed implemented a series of rate cuts aimed at supporting the economy, despite concerns that President Donald Trump’s extensive tariff policies could lead to a rapid inflationary episode. The rate reductions signify a departure from a strategy of increasing borrowing costs aimed at curbing excessive price inflation, which had temporarily surged to nearly 9% in 2022. Policymakers, under the leadership of Fed Chair Jerome Powell, face the critical task of determining the appropriate adjustments to interest rates that will avoid rekindling inflation while also preserving the integrity of the job market.

Market participants are increasingly anticipating that the Federal Reserve may implement its next interest rate cut as early as June. This shift in expectations follows a period where such predictions were deferred to July, a change attributed to the recent robust jobs report, according to analysts. Nonetheless, the Fed is “likely to be on the sidelines for the next several months,” they added. On Friday, both the benchmark 10-year and rate-sensitive 2-year U.S. Treasury yields experienced a decline, while U.S. stock futures remained relatively subdued.