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US inflation slowed more than expected in January, boosting expectations that the Federal Reserve might cut interest rates again later this year.
Figures released on Thursday by the Labour Department showed that the annual rate of consumer price inflation dropped to 2.4% in January, from 2.6% in December. Economists had predicted a more modest decline.
Monthly prices increased by 0.1%, falling short of expectations of 0.2%. The data indicate that price pressures are continuing to ease, bringing inflation closer to the Federal Reserve’s 2% target.
Core inflation — which excludes volatile food and energy prices — also eased. It increased by 3.1% in the year to January, down from 3.3% the previous month, signalling a broader slowdown in underlying price rises.
Energy and used cars drive slowdown
The fall in inflation was largely driven by declines in used-car, petrol, and airfare prices.
Used vehicle prices decreased by 4.2% in January, marking the largest monthly decline in over a year, as supply conditions improved and demand eased. Energy prices declined by 1.8%, with petrol dropping 3.5%, reflecting relatively stable global oil markets despite geopolitical tensions.
Airline fares declined by 2.1% as travel demand eased after the holiday season.
Shelter costs — one of the largest components of the Consumer Price Index (CPI) — continued to rise but at a slower pace. They increased 0.3% on the month, while annual growth slowed to 4.8%. Food prices edged up 0.2%, with grocery prices broadly stable but restaurant meals becoming more expensive.
The figures will offer some relief to households, many of whom have faced cumulative price rises of more than 20% since 2021. Average wage growth, running at around 4.1% annually, is now outpacing inflation, helping to restore some purchasing power.
Federal Reserve outlook
The data reinforce expectations that the Federal Reserve will continue gradually easing monetary policy after cutting rates by 75 basis points in 2025.
In a recent speech, Federal Reserve Chair Jerome Powell said that “disinflation is progressing”, while cautioning that policymakers remain alert to potential risks.
Financial markets reacted positively. The S&P 500 rose 0.8%, while the yield on the benchmark 10-year US Treasury bond fell to 3.95%, suggesting investors are betting on a further 25 basis point rate cut as early as March.
Global implications
US inflation trends are closely watched internationally. A prolonged period of higher US interest rates tends to strengthen the dollar, which can put pressure on emerging market currencies and borrowing costs.
Inflation has also been easing elsewhere. In the eurozone, the annual rate fell to 2.3% in January, while UK inflation declined to 2.1%, increasing the likelihood that the European Central Bank and the Bank of England will maintain their own rate-cutting cycles.
However, economists warn that risks remain. Proposed tariffs under the Trump administration, if implemented widely, could add between 0.5 and 1 percentage point to inflation, potentially complicating the Federal Reserve’s path.
For now, the January figures suggest that the US economy is making further progress in bringing inflation under control — but policymakers are likely to remain cautious as they attempt to secure a durable return to target.
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