A worker stocks beef fillets in the meat section of a Washington grocery store.
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Economists said inflation slowed in January as price pressures eased across a wide range of consumer staples such as food and gasoline, but prices for some items such as electricity and heating remained rising.
The Consumer Price Index, a key inflation measure, rose 2.4% in January compared to 12 months earlier, the Bureau of Labor Statistics said Tuesday. This was lower than expected, down from 2.7% in December.
Inflation remains above the goal of Federal Reserve policymakers, who aim for inflation levels around 2%, economists said.
Impact of tariffs and immigration policy
Mark Zandi, chief economist at Moody’s, said that without the Trump administration’s policies on tariffs and immigration, inflation would likely reach the Fed’s target.
Tariffs imposed by President Donald Trump on many trading partners are putting upward pressure on prices, as many companies pass on at least some of their import taxes to U.S. consumers, economists say. Additionally, immigration policies have reduced the supply of labor, putting some upward pressure on service prices.
“Broadly speaking, inflation remains too high for most Americans and for the Fed,” Zandi said. “But I think we’ve seen the worst. Barring policy changes, such as tariffs and immigration, inflation should return to more comfortable levels by this time next year.”
The Yale Institute for Budget Studies estimated in January that the effective U.S. tariff rate rose to 16.9%, the highest rate since 1932. The Supreme Court is poised to rule on the constitutionality of President Trump’s sweeping tariffs in the coming weeks.
‘Big warning’ in CPI report
Jason Pride, head of investment strategy and research at asset manager Glenmede, said in a note on Friday that the slowdown in inflation in January was “relatively broad-based”, apart from “acceleration in some services, particularly transport costs”.
But there is a “big caveat” to the CPI data, Zandi said. A quirk in the data from the fall government shutdown makes inflation look better on paper than it is in reality.
The record-long shutdown, which lasted from Oct. 1 to Nov. 12, prevented federal statisticians from collecting typical inflation data in October. Without that data, BLS assumed that no price increases occurred during the month for most categories of goods and services.
Moody’s expects CPI inflation to be about 2.7% if this data is included, Zandi said.
Inflation report likely won’t change Fed’s stance
The inflation report was released against the backdrop of calls for lower interest rates by President Trump, who recently announced his choice of Kevin Warsh to replace Federal Reserve Chairman Jerome Powell. Powell’s term ends in May.
However, economists do not expect January’s inflation report to prompt policymakers to cut rates any faster.
“While the expected downside in January CPI is welcome news for the Fed, we do not intend to change our baseline expectations for monetary policy based on our reading of inflation,” Bernard Jarosz, chief economist at Oxford Economics, said in a note on Friday. “Prolonged distortions from the closure in price data, strong growth prospects for this year, and a stable job market will keep the central bank on policy suspension until June.”
Where prices are rising or falling
While inflation for some goods and services has eased, it has risen for others.
For example, gasoline prices fell by about 3% on a monthly basis in January, and by 7.5% on an annual basis, according to CPI data.
Food inflation (including groceries and eating out) was 2.9% annualized in January.
Zandi said this is a high number by historical standards. The same applies to categories such as electricity, apparel, child care, medical care, and home heating.
City gas service prices rose by about 10% annually in January, according to CPI data.
Zandi said that apart from gasoline, “inflation rates for most essential goods are well above target, exceeding 3% in most cases.”
