Inflation cools to 2.4%, bolstering Fed’s cautious rate outlook

• Key Insight: Inflation showed signs of cooling in January, with the annual inflation rate dropping to 2.4%.
• Supporting data: Prices excluding food and fuel rose 0.3% in January, while food increased 0.2% and energy prices ticked down by 1.5%, the report found.
• Forward look: The January inflation reading remains slightly above the Fed’s longstanding 2% target and is likely to reinforce a cautious stance toward further rate cuts, though President Trump will likely continue to push the central bank to lower rates.

WASHINGTON — Consumer prices edged lower last month, according to a report from the Bureau of Labor Statistics, a reading that is likely to reinforce the Federal Reserve’s wait-and-see approach to further interest rate cuts in the near future.

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The BLS reported that the Consumer Price Index rose 0.2% in the month of January and 2.4% year over year, according to a report released Friday morning.

The annualized inflation reading is notably lower than it had been in prior months, hovering around 2.7%, well above the Fed’s 2% target. January’s reading remains higher than that target, but removes any urgency the central bank might have had to adjust its interest rate policy, despite persistent pressure from the White House to do so. 

Shelter costs, the largest driver of higher prices across the economy, rose 0.2% in January. Food increased 0.2%, but energy prices ticked down by 1.5%, the report found.

Some members of the FOMC, including Fed Gov. Lisa Cook and Fed Chair Jerome Powell, have stressed the importance of bringing inflation down to the central bank’s 2% target. The central bank is moving closer to its goal. Cook, in a February appearance, voiced concern about stubbornly above-target inflation readings and noted that the central bank’s credibility depends on getting inflation under control in the near future.

“After nearly five years of above-target inflation, it is essential that we maintain our credibility by returning to a disinflationary path and achieving our target in the relatively near future,” Cook said.

The numbers follow a better than expected January jobs report that suggests that labor market conditions are improving, as U.S. employers added 130,000 jobs and the unemployment rate dropped to 4.3%.

Federal Reserve Chair Jerome Powell said after the January rate-setting meeting that risks to both employment and inflation have “diminished a bit,” reducing the need for an immediate policy change. He said the committee remains “well positioned” to make decisions on a meeting-by-meeting basis as new data emerges.

“We’ll find our way forward as the data evolves,” Powell said. Most Federal Reserve policymakers in January supported holding off on additional rate cuts until the effects of three quarter-point reductions late last year have worked their way through the economy. The stable and surprisingly positive readings out of the BLS this week likely reinforce that view.

The Trump administration’s tariff policy — and the extent to which it will affect consumer prices in the months ahead — remains unclear and may take time to fully materialize, though a consensus is forming that the impact could be less volatile than initially feared.

“There is an argument for being optimistic about the path of inflation, but until I see stronger evidence that inflation is moving sustainably back down to target, that is where my focus will be, in the absence of unexpected changes in the labor market,” Cook added in her February appearance.