Financial markets awaiting signs that a years-long campaign to curtail inflation had not reversed with the new year were reassured Friday morning when the Bureau of Labor Statistics (BLS) updated its closely watched inflation gauge.
The consumer price index (CPI) increased 0.2% across all categories on a seasonally adjusted monthly basis in January, posting unadjusted 2.4% growth year over year. The all-items index had risen 2.7% annually in December and November, down from 2.9% and 3% growth in August and September, respectively.
Yields on U.S. Treasurys dipped slightly in response to the news, as signs of cooling inflation tend to reassure bond investors of the dollar value behind their government IOUs.
Excluding volatile food and energy prices, so-called “core CPI” increased 2.5% in January compared to 2.7% and 2.6% growth in December and November, respectively. Core CPI rose at an annual rate of 3% in September and 3.1% in August.
Economists polled by Reuters had projected a 2.5% increase in headline inflation in January, the same as economists polled by Bloomberg. Core inflation came in exactly at expectations.
BLS reported a 0.2% monthly and 3% annual rise in shelter inflation was the largest contributor to price growth in the all-items index, while airline fares, personal care, recreation and medical care pushed the core index higher.
Overall, the update offers optimism that Federal Reserve policymakers — who last year assured markets that inflation was on a consistent downward path back to a stated target of 2% annual growth — may indeed be right. The CPI showed 3% annual growth at the start of 2025, while core inflation was up 3.3%.
“Just a month or two ago, there was talk of ‘stagflation,’ or a combination of high inflation and high unemployment,” noted Lisa Sturtevant, chief economist of multiple-listing service Bright MLS, in commentary shared with Scotsman Guide.
“Now, is it possible we’re going to have a ‘Goldilocks’ economy, where unemployment is low and inflation is coming down?” she continued. “It’s probably a little too soon to call, and the economic data for February and March will be important signals.”
Nevertheless, the cooler-than-forecast inflation print follows government reporting Wednesday of hotter-than-forecast job growth in January, with the economy adding around 130,000 positions. Importantly, the job gains were heavily concentrated in the health care and social services sectors, while the monthly employment report also included severe revisions to last year’s job gains, dropping the yearly total from 584,000 to 181,000.
Friday’s inflation report was being watched closely for signals of what direction the rate-cut winds might blow when officials at the Federal Reserve next meet in early March to consider adjusting the federal funds rate, currently in a target range of 3.5% to 3.75%.
“The report adds to evidence that inflation is moving closer to the Federal Reserve’s target and keeps the door open to rate cuts later this year,” said Sam Williamson, senior economist at title insurance giant First American Financial Corp., sharing his reaction with Scotsman Guide.
“Near term, however, policymakers are likely to stay cautious as they watch whether tariff-related cost pressures feed through more broadly into prices,” he added. Supply-chain inflation rose consistently in the second half of 2025, which economists broadly attribute to President Donald Trump’s signature tariff policies.
Heading into the first half of 2026, those price hikes on wholesalers are expected to raise consumer prices.
The Fed has a dual mandate to maintain stable prices and maximum employment, both sides of which were in tension through much of last year as inflation remained elevated and labor markets weakened.
After leaving rates steady at the central bank’s January meeting, Fed Chair Jerome Powell said that “the risks to both have diminished,” affirmed by January’s inflation and employment readings.
The unemployment rate fell to 4.3% in January, down from 4.4% and 4.6% the two months prior. Stable or improving job creation and above-target inflation slowly declining to target levels might induce Fed policymakers to stand pat on rate cuts for the foreseeable future.
“Market participants are hoping that a new Fed chair could bring more rate cuts,” wrote Mortgage Capital Trading, a capital markets advisory firm, in commentary published after the CPI report was released Friday. “However, this week’s unemployment and inflation data could start to build a case for the opposite.”
