US CPI data is unusually cooler than normal

Consumer prices in January came in softer than expected, with the annual headline rate easing to 2.4%, from 2.7% previously. Core inflation, which excludes food and energy, rose 2.5% year-over-year, slightly below last month’s reading. Though this month’s report is typically noisy amid seasonal effects, the lack of any upward surprise signals that price pressures remain contained.

While inflation remains above 2%, today’s report is reassuring for markets as it signals tariff pass-throughs have remained modest so far. The broader trend of cooling price pressures, especially as shelter inflation continues to normalize, should also ease concerns about renewed inflation momentum, suggesting the Federal Reserve’s 2% target is within reach.

Report details

• Headline inflation rose 0.2% from the prior month, lower than expected, bringing the annual rate to 2.4%, from 2.7% prior. Core inflation, which excludes food and energy, rose 0.3%, as expected, bringing the annual rate to 2.5%, the slowest pace since March 2021. While January inflation reports tend to be noisy, given that companies typically raise prices at the start of the year, this cycle’s tariff pass-through effects add an additional layer of complexity. Encouragingly, the lack of any real upward surprise suggests the trajectory of cooling price pressures remains intact.
• The highly volatile energy category declined 1.5% in the month, weighed by a significant drop in gasoline prices, which more than offset the rise in natural gas prices amid a cold snap in most parts of the country. This dynamic was similarly evident in the reversal in strength in restaurant prices, as colder weather likely curtailed dining out activity. Together with an easing in the pace of increase in grocery prices, overall food inflation appeared to normalize following last month’s spike.
• Core inflation continues to be driven by services prices and shelter costs, which increased 0.2% in the period. Nevertheless, owners’ equivalent rent, a major component, has continued to steadily decelerate. Prices of discretionary services categories also rose, particularly airfares, which increased at the fastest pace since May 2022, suggesting robust demand for travel.
• Tariff-sensitive goods categories showed limited upward pressure. The increase in apparel and household furnishings prices remained subdued. Similarly, the increase in vehicle prices was restrained, with used cars and truck prices declining meaningfully for the second month in a row. Meanwhile, electronics and personal care products did see price increases. Overall, while there may still be some lingering effects of tariff pass-through, barring additional new tariffs, this effect should begin to fade by mid-year as we pass the initial surge in tariff rates from a year ago.
• The Fed's preferred supercore inflation measure increased by 0.6% in the period, keeping the annual rate flat at 2.7% from the prior month. The supercore inflation measure, which excludes shelter from core services and is primarily driven by wage costs, has not yet been an issue given the ongoing softening in labor demand.

Policy outlook

Overall, as inflation came in as expected, markets are likely breathing a sigh of relief as price pressures remain contained despite a very strong labor market report earlier in the week and amid persistent concerns over further tariff pass-through. With core inflation now at almost a four-year low and the Fed’s 2% target within reach, this is a reassuring data point. Nevertheless, this falls short of justifying near-term rate cuts. Continued labor market resilience gives policymakers cover to stay on hold, while further disinflation in the second half of the year—as tariff effects fade—should reopen the door to further easing.