Unexpected turn? Core CPI hits four-year low, Fed's new chair's debut raises rate cut probability to 70%

Due to lower gasoline prices and a slowdown in rent inflation, the U.S. Consumer Price Index (CPI) for January rose less than expected. Market pricing indicates that June once again becomes a hot window for Federal Reserve policy adjustments this year. However, considering factors such as tariffs, dollar depreciation, and service prices, the uncertainty around resuming rate cuts before summer remains.

Data Surpasses Expectations

On Friday (13th), the U.S. Bureau of Labor Statistics (BLS) announced that the CPI increased by 0.2% month-over-month in January, below the unrevised 0.3% rise in December. The annual CPI rate fell from 2.7% to 2.4%, hitting a new low since May 2025, with a market median expectation of 2.5%. The unadjusted core CPI for January rose by 0.3% month-over-month, in line with expectations, slightly up from December’s 0.2%. The annual core CPI declined from 2.6% to 2.5%, reaching a new low since March 2021, consistent with market forecasts. The increase in core CPI partly reflects one-time price hikes at the beginning of the year. The seasonal adjustment model used by the BLS, which accounts for seasonal fluctuations, has not fully captured the impact of these one-time price adjustments.

Looking at sectors, housing costs remain the main driver of inflation, but their growth has slowed. The housing index increased by 0.2% month-over-month in January, the largest contributor to the overall CPI increase, highlighting the persistent stickiness of housing-related costs.

Although the Trump administration canceled and reduced some import food tariffs, food prices still rose by 2.9% year-over-year.

Service prices increased by 0.4% month-over-month, higher than December’s 0.3%, mainly driven by a 6.5% surge in airline ticket prices. Healthcare costs rose by 0.3%, with hospital service prices soaring 0.9% and physician service prices up 0.3%.

Energy continued to weigh on inflation, with the energy sub-index decreasing by 1.5% month-over-month. Fuel prices dropped sharply by 5.7%, but pipeline gas service prices increased by 1%, likely reflecting higher heating demand during the cold snap in January.

Other items seeing price declines include used cars and trucks, down 1.8%, and motor vehicle insurance, down 0.4%.

Market analysis suggests that the slowdown in year-over-year inflation mainly results from the fading of last year’s high base effect. These moderate inflation data may be difficult for ordinary consumers to feel directly. Eric Winograd, Chief Economist at AllianceBernstein, wrote, “The core reason for this gap is that households focus on the absolute level of prices, while inflation measures the rate of change; a secondary reason is the price trends of essentials—food, medicine, rent—that are rising faster than overall inflation. These categories are far more important to families than the overall consumption basket.”

Policy Outlook

The White House welcomed the overall slowdown in inflation, with a spokesperson posting on social media: “The Fed should have already cut rates, which would further inject strong momentum into the U.S. economy.”

However, Americans concerned about the labor market and price resilience are increasingly dissatisfied with President Trump’s economic management. James McCann, Senior Economist at Edward Jones Investment Strategies, stated, “Overall, the data indicate that current price pressures remain somewhat elevated, but the downward trend in inflation continues, albeit uneven and slow. For the Fed, the policy tone is unlikely to change in the short term because of this.”

Market Expectations for Rate Cuts Rise

Federal funds rate futures show that the probability of a rate cut in June once rose to 70%, with the likelihood of three cuts this year returning to 50%. June will be the first FOMC meeting after Kevin W. Wirth’s appointment as Fed Chair.

Tiffany Wilding, Economist at PIMCO, said that the inflation report “appears quite encouraging on the surface,” with two main positive developments. First, the housing prices that have been rising since the pandemic are now slowing. Second, the impact of tariffs is gradually diminishing. As this trend continues, the Fed is likely to be more inclined to cut rates, and we consider two rate cuts this year to be reasonable.

However, Fed officials remain cautious. This week, Dallas Fed President Lori L. Logan stated that she believes the current monetary policy stance is sufficient to handle various economic risks, implying she may be reluctant to support restarting rate cuts. Her cautious attitude echoes that of Cleveland Fed President Bess H. Harker, who said the Fed prefers to remain patient when assessing recent rate cut effects.

Notably, concerns over high inflation have also spread across the Pacific; the Reserve Bank of Australia announced a rate hike earlier this month.

The Fed uses the Personal Consumption Expenditures (PCE) Price Index as its preferred inflation gauge targeting 2%. According to First Financial Data, based on CPI data, Wall Street’s forecast range for January’s core PCE month-over-month increase is 0.2%-0.5%, with a year-over-year forecast of 2.9%-3.2%.

The U.S. government will release December’s PCE inflation data next week. Before the CPI report, U.S. Treasury Secretary Janet Yellen predicted that inflation might rebound toward the Fed’s 2% target around mid-year. Due to the government shutdown, the latest available data is the November core PCE inflation rate at 2.8%. Historically, CPI’s average increase tends to be about 0.5 percentage points higher than PCE.

Some institutions expect that, influenced by import tariffs and the dollar’s depreciation against major trading partners last year, inflation will experience a phased rebound in the coming months. Lydia Bessur, Senior Economist at Ernst & Young-Parthenon, stated, “We expect inflation to remain somewhat sticky in the first half of this year. The data gaps caused by the government shutdown, which have led to downward biases in CPI inflation, will continue to distort the data through April.”