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U.S. Inflation Eased at Start of the Year
Colby Smith covers the Federal Reserve.
Inflation in the United States eased by more than expected at the start of 2026, providing a reprieve to the Federal Reserve as it contends with yet another year of consumer prices rising faster than the central bank’s target.
Here is what the latest Consumer Price Index showed on Friday.
The numbers
Overall inflation eased to 2.4 percent in January from the same time last year. That was down from the previous 2.7 percent annual pace.
“Core” inflation, which filters out volatile food and energy prices, ticked down to 2.5 percent on a year-over-year basis. It last stood at 2.6 percent.
The takeaway
The latest C.P.I. report comes amid uncertainty over the trajectory for inflation after President Trump’s tariffs began to push up some consumer prices last year.
The impact of those levies has been less than initially feared, but it is not clear if the full effects have materialized. That has left economists and policymakers to wonder how much higher inflation may rise and when it will begin to retreat.
The latest inflation data, released by the Bureau of Labor Statistics, came in below economists’ forecast, offering some relief to those concerned about a re-acceleration. But stubbornly high “core” inflation suggests some stickiness to certain price pressures, likely keeping policymakers wary about cutting interest rates too quickly.
“This report is pretty encouraging for the inflation outlook going forward,” said Sarah House, a senior economist at Wells Fargo.
What else to know
How quickly inflation eases is of crucial importance to the White House, which is trying to counteract a groundswell of concern about affordability ahead of this year’s midterm elections.
Mr. Trump has repeatedly sought to dismiss worries about how Americans are faring financially and has instead declared that the economy is booming.
January’s jobs report was much stronger than expected, with 130,000 positions added for the month as the unemployment rate ticked down to 4.3 percent, according to data released on Wednesday. Annual revisions to earlier data, which are routine but have been much more significant than usual in recent years, painted a much more dismal picture for 2025, however. The economy added only 181,000 jobs over the entire year, down from an earlier estimate of 584,000. That is the slowest pace since 2010, aside from 2020 when the pandemic hit.
People have grown far less confident about the economy. Data released last month by the Conference Board showed one measure of consumer confidence falling to its lowest level since 2014, as respondents flagged tariffs and elevated prices for everyday staples like groceries, among other anxieties.
Why did inflation ease in January?
Economists had expected both overall and core inflation to rise 0.3 percent in January. The broader metric instead notched a 0.2 percent monthly increase, while the core gauge rose 0.3 percent over the same period.
Food prices rose in January, but only modestly. Energy prices fell 1.5 percent alongside costs associated with used cars and trucks and car insurance. That helped to offset increases in other categories like airfares, which rose 6.5 percent last month. Services related to personal care rose 1.2 percent, while those for recreational activities rose 0.5 percent. Internet services rose 1.8 percent in January and are up 3.5 percent from a year earlier.
Housing costs, which make up more than a third of the overall index, rose just 0.2 percent for the month. The closely watched metric tracking the rental cost of owned housing was up 3.3 percent compared to the same time last year.
How much are tariffs pushing up prices?
According to a study released by the Federal Reserve Bank of New York on Thursday, American companies and consumers have borne the brunt of the broad-based tariffs that Mr. Trump imposed in 2025.
Over the course of last year, the average tariff rate on U.S. imports swelled to 13 percent from just 2.6 percent, as the president raised levies on nearly all of the country’s trading partners. He later granted exemptions on certain products. Using import data through November, a group of economists at the bank found that nearly 90 percent of the economic costs associated with tariffs have fallen on U.S. businesses and their customers.
For much of last year, companies tried to avoid raising prices on their customers to cover higher expenses tied to tariffs. They did that in part by building up inventories before the levies were imposed. Others opted to absorb the higher costs themselves, resulting in reduced profits.
Those stockpiles are mostly gone now, and many companies have exhausted other avenues to defray the costs. That has resulted in higher prices for tariff-sensitive items like furniture, household appliances and apparel. Officials at the Fed broadly expect the peak price impact from tariffs to materialize within the next three months, before fading. If that forecast proves accurate, that will help to bring down inflation later this year.
Household furnishings and supplies rose 0.3 percent in January and is up over 3.8 percent over the past 12 months. Apparel prices rose 0.3 percent as well for the month.
What’s behind the seasonal quirks in January’s data?
One caveat with January’s data is that it usually comes in hot compared to other months of the year. In fact, researchers at the Boston Fed calculated in a study last week that January’s average inflation rate since 1985, once seasonally adjusted, was 0.03 percentage points higher than at any other point in a given year.
The researchers cite a handful of reasons for this phenomenon. They highlight seasonal pricing patterns that linger even after the Bureau of Labor Statistics makes adjustments to try to eliminate those distortions. They also note that prices are often changed at the start of the year, and when that occurs, it typically involves sectors that have seen higher inflation overall compared to other industries. That is especially true for things like medical products or services such as shipping or streaming subscriptions.
These quirks do not mean that January’s report will be dismissed outright, but it is likely to prompt officials at the Fed to call for more data to gain greater clarity on how inflation is faring.
How long will the Fed hold rates steady?
The Fed will receive one more Consumer Price Index report before it gathers to vote on rates at its next meeting, in mid-March. Unless there is a dramatic shift in the economic outlook in the intervening weeks, officials at the central bank are likely to once again hold rates steady at that meeting, extending a pause in cuts that began last month.
Policymakers have argued that after three quarter-point cuts from September to December, they can afford to wait and see how the economy is evolving before shifting rates from the current range of 3.5 percent to 3.75 percent.
Most officials still see some scope to cut at some point this year as they probe what exactly constitutes a “neutral” level that neither stimulates growth nor slows it down. According to projections released in December, the neutral rate is broadly in the ballpark of 3 percent.
Right now, there appear to be two paths to future cuts. The first revolves around the labor market. Clear signs of material weakness — most likely in the form of the unemployment rate spiking — would prompt the central bank to move. The second revolves around inflation and the pace at which it returns to the Fed’s 2 percent target, a goal that is measured by the Personal Consumption Expenditures Index. The central bank has missed that target for roughly five years. As of the index’s latest release in November, it stands at 2.8 percent.
The Fed is wary about sending the wrong signal about its commitment to its 2 percent target, hence its caution about cutting rates too swiftly. At the same time, policymakers do not want to move so slowly that they jeopardize the labor market.
This tough balancing act is likely to lead the Fed to take its time to restart cuts, with further reductions now seen as delayed until the summer. Jerome Powell will no longer be Fed chair after May, meaning the responsibility of forging a consensus at the Fed will fall to his successor. Mr. Trump has said he plans to nominate Kevin M. Warsh, a former Fed governor, for the top job, which requires Senate confirmation.
Mr. Warsh has supported the idea of further cuts on the basis that tariffs are not inflationary. He has also argued that high growth does not necessarily mean more intense price pressures, because of potential productivity gains that appear to be accompanying it along with the rapid growth of artificial intelligence.
Jonathan Hill, head of U.S. inflation strategy at Barclays, said he expected inflation to decelerate in the second half of the year, paving the path for the Fed to cut rates twice in 2026.
Colby Smith covers the Federal Reserve and the U.S. economy for The Times.
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