The latest inflation report delivered encouraging news for the economy, with price growth cooling more than expected in January and strengthening optimism about potential rate cuts ahead.
The Consumer Price Index rose 2.4% year over year, according to the Bureau of Labor Statistics. That figure marked a 0.3% point drop from December and represented the lowest annual reading since May 2025.
Core inflation, which excludes food and energy, increased 2.5% compared to a year earlier.
Economists surveyed by Dow Jones had projected a 2.5% rise for both headline and core figures.
Every month, overall prices climbed 0.2%, while core prices rose 0.3%. Forecasts had expected 0.3% increases across the board.
Markets reacted quickly. Treasury yields declined, and traders raised expectations that the Federal Reserve could begin cutting interest rates as soon as June.
According to CME Group’s FedWatch tool, the probability of a June rate cut jumped to roughly 83% following the report.
“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.”
Shelter costs, which account for more than one-third of the CPI index, rose just 0.2% in January. The annual pace for shelter slowed to 3%, signaling moderation in one of the most persistent inflation categories.
Food prices increased 0.2%, with gains in most grocery categories. Energy prices fell 1.5% during the month.
Vehicle costs remained contained, with new car prices edging up 0.1% and used car and truck prices declining 1.8%.
The data comes after months of claims that President Donald Trump’s tariff policies would reignite inflation. So far, price pressures appear more targeted than broad-based.
“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 roughly in line with levels seen shortly after Trump rolled out aggressive tariffs in April 2025, countering arguments that the measures would automatically drive runaway inflation, per Trending Politics.
Economic growth has remained resilient. The Atlanta Fed’s GDPNow model estimates fourth-quarter growth at 3.7%, suggesting the economy closed 2025 on a solid footing.
Still, challenges remain. Inflation remains above the Federal Reserve’s 2% target, and job growth has slowed, with employers adding an average of 15,000 jobs per month last year.
Consumer spending, while steady through much of 2025, flattened toward the holiday season.
Federal Reserve officials are widely expected to hold rates steady for now, after cutting three times in the latter half of 2025.
Treasury Secretary Scott Bessent struck an optimistic tone, telling CNBC he sees an “investment boom” helping return inflation to target.
“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.
While investors closely watch CPI, the Federal Reserve relies more heavily on the Commerce Department’s Personal Consumption Expenditures index, with the next reading scheduled for release on Feb. 20.
For now, January’s inflation report provides fresh evidence that price pressures are easing, offering potential relief for households and reinforcing expectations that monetary policy could soon shift.
