US consumer prices rose less than expected in January due to cheaper gasoline and a moderation in rental inflation, but households faced higher costs for services, suggesting little urgency for the Federal Reserve to resume interest rate cuts before the summer.
The Labor Department’s Consumer Price Index report on Friday showed that underlying inflationary pressures increased last month, likely because companies implemented price increases early this year for goods and services including personal care, recreation, airfares and hospital services.
The slowdown in headline inflation was welcomed by the White House, with a spokesperson posting on social media that “the US economy will be further boosted by long-awaited Fed rate cuts.” Americans concerned about the job market and affordability have soured on President Donald Trump’s handling of the economy.
The report followed news this week of an acceleration in job growth in January and a drop in the unemployment rate to 4.3% from 4.4% in December.
“Overall, the data suggests that price pressures are still a bit too high for reassurance for now, but the direction of inflation continues to look lower, even if this has proven to be a bumpy and slow process,” said James McCann, senior investment strategy economist at Edward Jones. “This probably won’t change much for the Fed in the short term.”
The consumer price index rose 0.2% last month, following an unchanged 0.3% increase in December, according to the Labor Department’s Bureau of Labor Statistics. Economists polled by Reuters had forecast the CPI to rise 0.3%. With the January CPI report, the BLS published recalculated seasonal adjustment factors to reflect price movements through 2025.
The report was delayed somewhat by the three-day federal government shutdown last week. Some economists attributed January’s favorable headlines to volatility in the CPI data caused by last year’s extended shutdown, which prevented the collection of October prices.
Lodging costs, which include rent as well as motel and hotel rooms, rose 0.2% after rising 0.4% in December. Food prices rose 0.2%, after accelerating 0.7% in the previous month. Supermarket prices rose 0.2% as higher priced cereals and baked goods were partly offset by a 0.4% fall in beef costs.
Eggs and coffee were also relatively cheaper last month, as were fresh fruit and vegetables. The Trump administration has rolled back and reduced tariffs on some imported foods. Still, food prices rose by 2.9% compared to a year ago.
Consumers also got more relief at the pump, with gasoline prices falling 3.2% in January from December. Although electricity prices fell by 0.1%, they increased by 6.3% year-on-year, driven by data centers’ demand for artificial intelligence.
In the twelve months to January, the CPI rose by 2.4%. The slowdown in annual inflation from 2.7% in December largely reflected last year’s higher figures, which were excluded from the calculation. The lower inflation rates were unlikely to resonate with consumers.
“The primary explanation for the gap is that households focus on the price level, while inflation measures price change, but a secondary explanation is the behavior of essential household items,” said Eric Winograd, chief economist at AllianceBernstein. “The prices of food, medicine and rent are rising faster than the entire range, and those prices are more important to households than the total package.”
The financial markets increased the chances of an interest rate cut in June. The Fed left its benchmark interest rate within the range of 3.50%-3.75% last month. Stocks on Wall Street traded lower amid turmoil in the technology sector. The dollar gained against a basket of currencies. Yields on US government bonds fell.
Core inflation was warmer in January
Excluding volatile food and energy components, the CPI rose 0.3%, after rising 0.2% unchanged in December. Some of the increase in the so-called core CPI likely reflected one-time price increases around the year 2008, which economists said were still not fully explained by the seasonal adjustment factors, the model used by the BLS to remove seasonal fluctuations from the data.
Personal care costs rose 1.2%, while recreation rose 0.5% and communication rose 0.5%. The pass-through of tariffs persisted, even if mild. Clothing prices rose 0.3%, while the cost of home furnishings and supplies rose 0.3%.
Prescription drug prices remained unchanged. A 1.8% drop in used car and truck prices kept core commodity prices flat for the second month in a row. Prices of core goods excluding cars rose 0.4%, the highest level since February 2023.
The cost of services excluding energy increased by 0.4%, after an increase of 0.3% in December. Services were boosted by a 6.5% increase in air fares. Healthcare costs rose 0.3%, with prices for hospital services rising 0.9% and prices for physicians rising 0.3%. Owners’ equivalent rents rose 0.2%, following a 0.3% rise in December.
There were also increases in the prices of recreational services, haircuts and education and communication services. But car insurance prices fell.
In the twelve months to January, the so-called core CPI rose by 2.5%. That was the smallest gain since March 2021 and followed a 2.6% increase in December. This also reflected that last year’s higher readings disappeared from the calculation.
The Fed tracks personal consumption expenditure price indices for its 2% inflation target. Both measures are well above the target. Based on the CPI data, economists’ estimates for the rise in core PCE inflation in January ranged from 0.2% to 0.5%. Year-on-year estimates for core PCE inflation in January were between a rise of 2.9% and 3.2%. The government will release December PCE inflation data next week.
Economists expect inflation to pick up for some time this year, citing the pass-through of tariffs and the dollar’s depreciation against the currencies of the United States’ major trading partners last year. The trade-weighted US dollar fell about 7.4% last year.
“We expect inflation to remain somewhat stable in the first half of the year,” said Lydia Boussour, senior economist at EY-Parthenon. “The downward impact on CPI inflation caused by the lack of data collection during the government shutdown will continue to distort data through April.”
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)
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