U.S. January CPI Inflation Cools but Risks Remain; Federal Reserve May Continue to Hold Steady

On Friday local time, data released by the U.S. Department of Labor showed that U.S. consumer price inflation in January was below market expectations, providing some relief to American consumers who have suffered from soaring prices in recent years. As companies raised prices at the start of the year and the labor market stabilized, these factors may lead the Federal Reserve to keep interest rates unchanged for a period.

Following the data release, the dollar index fell nearly 20 points in the short term, major non-dollar currencies rose across the board, spot gold surged over $20, and S&P 500 and Nasdaq 100 futures turned higher. Traders estimate a 50% chance of a third Fed rate cut this year. According to the CME FedWatch tool, the probability of a rate cut in June has been raised to about 83%.

Specific data shows that the unadjusted CPI year-over-year in January was 2.4%, the lowest since May 2025, below market expectations of 2.5%. The seasonally adjusted CPI monthly rate in January was 0.2%, lower than the expected 0.3%, with the previous value at 0.3%.

It should be noted that part of the year-over-year decline is due to base effects—high inflation readings from January 2025 are no longer included in the recent 12-month comparison period.

Excluding food and energy costs, core CPI year-over-year rose 2.5%, hitting a new low since March 2021, matching expectations of 2.5%, and down from 2.6%. The seasonally adjusted core CPI monthly rate in January was 0.3%, in line with expectations, up from 0.2% in the previous month.

Analysts say that the report released on Friday shows inflation is cooling, but it’s important to note that prices for food, gasoline, and rent surged significantly after the pandemic, and overall consumer prices remain about 25% higher than five years ago.

The U.S. Bureau of Labor Statistics pointed out that in January, used car prices fell sharply by 1.8% month-over-month, significantly dragging down core inflation. Energy-wise, gasoline prices in January decreased by 3.2% month-over-month, the third decline in the past four months, and down 7.5% year-over-year. Food prices in January rose 0.2% month-over-month, after a large increase of 0.6% in December; the year-over-year increase was 2.1%.

Due to the federal government’s brief three-day shutdown last week, this report was slightly delayed. A longer government shutdown last year caused price data for October to be uncollected, leading to abnormal fluctuations in CPI data. Economists previously expected such volatility to subside in the January data.

Some economists note that the missing housing cost data from October last year may have artificially lowered estimates of housing inflation during certain periods in 2025. However, this issue does not affect recent month-over-month inflation figures.

In recent years, January’s core CPI data has often exceeded expectations. Economists point out that the model used by the U.S. Bureau of Labor Statistics to remove seasonal fluctuations has not fully accounted for the impact of one-time price increases at the start of the year.

January’s price increases likely reflect both one-time early-year price hikes and the cost pass-through effects of President Trump’s comprehensive tariffs.

Economists expect inflation to rise again for a period this year, driven by the transmission of import tariffs and the dollar’s depreciation against major trading partners last year. The trade-weighted dollar index fell about 7.4% last year.

Just two days before this inflation data was released, the government published a better-than-expected non-farm payroll report: strong job growth last month and unemployment falling to 4.3%.

Despite the easing of inflation, the Federal Reserve still faces delicate and complex policy decisions in the final months of Chair Powell’s eight-year term. The Fed aims to keep inflation near 2%, but this target has not been met for nearly five years. Currently, policymakers are cautiously balancing: suppressing inflation while avoiding significant shocks to the labor market.

Since mid-2022, when inflation briefly exceeded 9%, U.S. inflation has declined significantly. However, price increases remain relatively high, eroding consumer purchasing power and putting pressure on policymakers.

In recent surveys, consumers consistently list “high prices” as one of their top concerns. Inflation issues during Biden’s administration have fueled dissatisfaction, which is seen as paving the way for Trump’s return to the White House. In this year’s congressional elections, “affordability” is expected to be a key battleground issue.

Many economists also expect that as price pressures ease, inflation will further decline by 2026. Companies like PepsiCo and General Mills have announced plans to lower some food prices to attract price-sensitive consumers, indicating demand may be weakening, making it difficult for companies to fully pass on rising costs.

Signals from survey data and financial markets show that neither consumers nor investors are currently worried about a sharp rebound in inflation. This is reassuring, as widespread expectations of rising prices could lead to preemptive spending or more aggressive wage demands, creating a self-reinforcing inflationary cycle.

(Article source: Caixin)