Inflation ticked higher in January as stubbornly high prices continued to strain Americans’ household finances as the Federal Reserve weighs a continued pause to its interest rate cut plans.
The Labor Department on Wednesday said that the consumer price index – a broad measure of how much everyday goods like gasoline, groceries and rent cost – increased 0.5% in January while it rose to 3% on an annual basis. The annual figure is the highest since June 2024.
Both the annual and headline CPI figures were hotter than the estimates of economists polled by LSEG, who had predicted inflation rose 0.3% on a monthly basis and 2.9% from a year ago, and came in higher than last month’s readings of 0.4% and 2.9%, respectively.
So-called core prices, which exclude more volatile measurements of gasoline and food to better assess price growth trends, were up 0.4% in January and 3.3% on an annual basis and were hotter than expected. LSEG economists had estimated a monthly rise of 0.3% and annual increase of 3.1%. Both figures were 0.1 percentage points higher than last month.
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The report showed that inflationary pressures in the U.S. economy remain persistent despite progress in bringing inflation closer to the Federal Reserve’s 2% target over the past two years.
High inflation has created severe financial pressures for most U.S. households, which are forced to pay more for everyday necessities like food and rent. Price hikes are particularly difficult for lower-income Americans, because they tend to spend more of their already-stretched paycheck on necessities and have less flexibility to save money.
Energy costs rose 1.1% in January, a slower pace than the 2.4% reading in December. Gas prices were up 1.8% last month, while natural gas prices increased by the same amount.
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Food prices increased 0.4% in January. The food at home index was up 0.5% for the month, with a 15.2% increase in the cost of eggs accounting for about two-thirds of the index’s total increase. Prices of fruits and vegetables helped offset some of the index’s increase, falling 0.5% for the month, while cereals and bakery products also decreased by 0.4%.
The food away from home index was up 0.2% in January. Prices for limited service meals were up 0.3% for the month, while full service meals saw a smaller 0.1% increase.
Housing prices rose 0.4% in January and accounted for nearly 30% of the monthly CPI increase. Compared with a year ago, shelter prices are up 4.4%, which the Labor Department noted is the smallest 12-month increase since January 2022.
Transportation costs rose 1.8% in January and are up 8% from a year ago. Car insurance prices were a key contributor, having increased 2% in January and11.8% from a year ago. Airline fares increased 1.2% last month and are up 7.1% from a year ago.
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The data comes after the Federal Reserve announced a pause in its interest rate cutting plans at the central bank’s meeting last month, leaving the benchmark federal funds rate at a target range of 4.25% to 4.5%. Fed Chair Jerome Powell signaled that policymakers are in no hurry to cut interest rates further and will monitor inflation readings as well as labor market data as they weigh their next move.
“Some of January’s bad inflation print was due to one-off factors, like egg prices surging as avian flu swept across the nation’s agriculture industry, or the month’s cold snap and stiffer sanctions on Russia raising fuel oil prices,” said Bill Adams, chief economist for Comerica Bank. “But other inflationary pressures look like businesses resetting prices higher at the turn of the year to pass on increased expenses they felt in 2024.”
“The Fed will see January’s hot inflation print as confirmation that price pressures continue to bubble beneath the economy’s surface. That will reinforce the Fed’s inclination to at least slow and possibly even end rate cuts in 2025. The Fed is also watching the impact of higher tariffs, more restrictive immigration policies, and tax cut plans. These policies could all add to inflation as their effects ripple through the economy, causing the Fed to keep interest rates higher than they would have been under the status quo,” Adams added.
Markets reacted to the January CPI print and saw the probability of the Fed leaving rates unchanged at its next policy meeting in March rise to 97.5%, up from 95% a day ago and 83% last week, according to the CME FedWatch tool.
This is a developing story. Please check back for updates.
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