Inflation in the United States eased in January as prices for energy and used vehicles declined, offering a positive signal for the economy and policymakers. The Department of Labor reported that the consumer price index (CPI) rose 2.4% over the 12 months to January, down from 2.7% in December. This marked the slowest annual increase since May.
The slowdown could strengthen arguments from President Donald Trump and others that the Federal Reserve has room to reduce interest rates without triggering renewed price pressures. Analysts, however, warned that the path to the Fed’s 2% inflation target may face challenges if businesses pass higher tariff costs onto consumers or if labour shortages push up service prices.
For now, the impact of tariffs appeared limited. Excluding food and energy, commodity prices remained largely unchanged in January. Neil Birrell, chief investment officer at Premier Miton Investors, said the effects of tariffs remain uncertain and pointed to other factors that may have influenced the figures. He noted that the report could “ease the path towards a cut in rates sooner rather than later.” Birrell added, “The US economy looks to be in fine fettle with growth strong, inflation stable, the job market looking firmer and a Fed that has room to manoeuvre.”
The White House quickly welcomed the report. Speaking at the White House on Friday, Trump described the economy as “unbelievable” and said the United States is “the hottest country anywhere in the world.” The administration highlighted strong job growth, with the Department of Labor reporting higher-than-expected gains last month. A White House statement credited Trump with overcoming what it called “Joe Biden’s inflation crisis” and suggested that the economy could accelerate further if the Fed implemented “long-overdue” rate cuts.
Market response to the inflation data was muted, but expectations for a rate reduction in June remain. Atakan Bakiskan, a US economist at Berenberg, said recent inflation and job figures gave Fed officials a strong start to the year. He cautioned, however, that rising wages could keep service inflation above the Fed’s target, which has been missed for nearly five years.
Price movements in January varied by sector. Personal services, including dry cleaning and haircuts, rose 1.6% from December and nearly 7% from a year earlier. Cigarettes, airfares, and music streaming subscriptions also saw price increases. Meanwhile, rents rose 0.2%, down from a 0.4% monthly increase in December. Used car and truck prices fell 1.8%, while energy costs dropped 1.5%. Grocery staples also showed moderation, with steak prices down more than 2% from December, though still up nearly 13% year-on-year, and eggs falling more than 34% from January 2025.
The latest figures indicate a mixed but overall cooling inflation environment, offering relief to consumers and potential policy flexibility for the Federal Reserve.
