Prices for goods and services rose at a slower pace than expected, giving the Fed more room to cut interest rates.
Prices of goods and services such as airline tickets and hospital care rose 2.4%. Core prices excluding food and energy items rose 2.5%, which was also below expectations according to a report Friday from the Bureau of Labor Statistics. The year-over-year increase is the lowest since 2021.
Slower inflation and cooler prices eases concerns that the Trump administration’s soaring tariffs will cause the higher than desired inflation to persist. But there remain areas of concern. Increasing prices are still squeezing budgets, especially for lower income consumers.
“The headlines came out slightly lower than expected, but the market took them positively,” said Fiona van der Stuer, an Associated Economist at Wolfe Research.
According to van der Stuer, slight increase of core goods prices in January could be a sign that most tariffs related increases have already been passed along to consumers by more than 60 percent.
Van der Steuer expects inflation will stay in a ‘sticky’ pattern at the beginning of 2026 and will likely to calm down in the second half.
“Also, lower gas prices in January could boost consumption among low-income households whose larger share of total spending is fuel,” she said.
The long government shutdown in the fall and the resulting disruption in data collection may have resulted in underreporting price increases which could lead to higher numbers as data collection improves.
“Recent CPI releases have come in below consensus expectations. As inflation eases, core pressures are contained, and expectations remain anchored, monetary policy should adjust accordingly,” said Nigel Green, the CEO of global financial advisory giant deVere Group.
According to Green’s analysis, Green thinks the Fed should cut the rates because current policy still tends to be restrictive. The policy should adjust high rates for emergencies now that inflation has cooled for consecutive months. Keeping high rates for too long could lead to an over-tightening and contraction in housing and investment.
Interest rate hike in 2022 caused high consumer price increase, which slammed the economy. High prices and a financially tightened environment created by aggressive rate hikes in a range of 4.25%-4.50% in 2022 have affected a current 2% range CPI.
Green stresses that financial markets are adapting to an already reduced inflation environment.
“Equity investors understand that inflation near 2.4% reduces the risk of further tightening,” Green said, urging the Federal Reserve to cut rates at its next meeting in March.
Consumers still have concerns about high prices according to recent surveys. As the core inflation that consumers feel the real impact might be stronger than the report, overcoming the affordability gap between wages and cost of living is getting harder.
