U.S. Inflation Cools Faster Than Expected in January, Strengthening Case for Fed Easing Later in Year

U.S. consumer price growth slowed more than expected in January, moving closer to the Federal Reserve’s 2% inflation target and offering policymakers fresh evidence that price pressures are easing, helped in part by lower energy costs.

Data released on Friday showed headline consumer prices rose 2.4% year-on-year in January, below market expectations of 2.5% and down from December’s 2.7% pace. On a monthly basis, the consumer price index increased by 0.2%, undershooting forecasts of 0.3% and marking a moderation from the prior month.

According to the Labor Department’s Bureau of Labor Statistics, higher shelter and food prices accounted for most of the monthly increase, but these were partially offset by a decline in energy costs, which helped temper overall inflation.

Core inflation—excluding volatile items such as food and fuel—rose 2.5% on an annual basis and 0.3% month-on-month, both in line with expectations. The figures reflected higher prices for services such as air travel and medical care, balanced by declines in the cost of used cars and trucks, household furnishings, and motor vehicle insurance. In December, core inflation stood at 2.6% year-on-year and 0.2% on the month.

Some economists had warned that January inflation could be boosted by price hikes typically implemented by companies after the holiday shopping season. However, those increases “weren’t significant factors” in January’s data, according to Paul Ashworth, Chief North America Economist at Capital Economics.

The inflation report, which was slightly delayed due to a temporary federal government shutdown, followed a strong labor market update earlier in the week. That report showed nonfarm payrolls growth far exceeded expectations in January, while the unemployment rate edged lower, underscoring continued resilience in the U.S. job market.

Federal Reserve policymakers are now likely to assess both the cooling inflation trend and the robust employment data as they consider the next steps for interest rates. At its most recent meeting, the Fed left rates unchanged at a range of 3.5% to 3.75%, pointing to a stabilizing labor market and steady—though still elevated—inflation pressures.

Last year, the central bank implemented a series of rate cuts aimed at supporting economic growth, even as concerns lingered that President Donald Trump’s broad tariff policies could reignite inflation. Those cuts marked a shift from the aggressive tightening cycle that followed the post-pandemic inflation surge, which saw price growth peak near 9% in 2022.

As outgoing Fed Chair Jerome Powell and his colleagues look ahead, the challenge remains finely balanced: easing policy enough to sustain economic momentum without risking a resurgence in inflation or undermining labor market stability.