Inflation ticked upward in January, rising higher than many economists expected—a sign that the economy is headed in the wrong direction.
Prices rose 3% in January from a year ago — a full percentage point higher than the Fed’s 2% target goal, the Bureau of Labor Statistics reported on Wednesday. The consumer price index (CPI), which measures the average change in prices paid by consumers for a basket of goods and services, rose 0.5% from the month prior, the highest figure it’s been since August 2023.
January inflation was strong because of the rise of shelter, particularly rent, and food prices—namely eggs, which rose 15% since December because of avian flu causing farms to euthanize their birds. On Wednesday, the Fed signaled that it isn’t planning to cut interest rates anytime soon— a decision that’s not boding particularly well for Trump, whose promise to bring down inflation on Day 1 will be further tested by the impact of proposed tariffs on foreign countries.
“The Fed doesn't want to see inflation crash, go down, or go negative, they just want to see it slow down gradually,” said Carl Weinberg, chief economist at High Frequency Economics. “The data today support everything that the Fed Chair has been telling us in front of Congress, which is that the Fed has no reason to rush to cut interest rates, but it has no reason to hike either.”
In January, shelter prices, which account for more than a third of the entire index, contributed nearly 30% to the CPI’s uptick from December because of the “owner equivalent rent” index, or what the Bureau of Labor Statistics estimates to be the total cost of owning or operating a home. A housing shortage since the pandemic continues to drive up home prices, locking people into their pre-existing mortgages.
Food was up overall by 0.4%. Despite egg prices’ rapid increase and real world implications, the overall impact on the CPI index was negligible. Other volatile categories like gasoline are up by 1.8% from last month, and the higher cost of jet fuel has been contributing to increased airline fares.
Used car prices are high this month, driven by low inventory levels following the pandemic. The rise in car prices has in turn pushed auto insurance costs higher, said Stephanie Roth, chief economist at Wolfe Research.
On the other hand, clothing prices fell in January by 1.4% as retail stores aim to lower their inventory levels after the holiday season, according to Stan Shipley, managing director at Evercore ISI.
During testimony before the Senate Banking committee on Wednesday, Federal Reserve Chair Jerome Powell said the Fed is “not in a hurry” to cut interest rates, despite pressure from President Trump.
As a result, the stock market fell by 200 points today due to interest rates remaining higher than expected at 4.25% to 4.5%.
President Trump took to Truth Social to state his views on the Fed’s decision: “Interest Rates should be lowered, something which would go hand in hand with upcoming Tariffs!!! Lets Rock and Roll, America!!!”
However, economists largely believe that Trump’s proposed tariffs, like his recent announcement of 25% tariffs on aluminum and steel will have an inflationary impact in the months to come, as would the impact of mass deportations of 14 million immigrants.
Because the economy is already at full employment, there aren’t enough workers to spare, said Weinberg. “If you lose a lot of workers, then we’ll lose production…there aren’t enough idle workers sitting around to take those jobs,” he said.
