January inflation slows to 2.4%, core prices rise 2.5% fed target nears

Inflation measure fell to nearly a five-year low in January, dropping to 2.4% year-over-year as gas prices declined and apartment rental price growth slowed, offering some relief to consumers. Core prices, excluding food and energy, rose 2.5% from a year ago, the smallest increase since March 2021. Consumer prices remain about 25% higher than five years ago, with affordability a significant political issue.

The inflation rate in January was down from 2.7% in December, approaching the Federal Reserve’s 2% target. Core prices, which exclude volatile food and energy categories, saw a 2.5% increase in January compared to the previous year, a decrease from 2.6% in December. This marks the smallest increase in core prices since March 2021. On a monthly basis, consumer prices rose 0.2% in January from December, while core prices increased by 0.3%.

A sharp drop in the price of used cars, which fell 1.8% in January from December, contributed to the slowdown in core inflation. This decline in used car prices was the biggest in two years. Gas prices also fell 3.2% last month, marking the third decrease in the past four months and a 7.5% drop from a year earlier. Grocery prices saw a modest rise of 0.2% in January, down from a larger 0.6% increase in December, and are up 2.1% year-over-year. Hotel prices decreased by 0.1% in January and have fallen 2% from last year.

Rental prices and the cost of owning a home, which together constitute a third of the inflation index, both rose by only 0.2% in December. Rents increased just 2.8% from a year earlier, a significant slowdown compared to the pandemic period when rents rose by more than 8% in 2022. Some economists note that the rental figures may have been distorted by a government shutdown in October, which interrupted data collection and led to the use of estimated figures that could have artificially lowered housing costs.

There were signs that retailers are passing on more of the costs associated with President Donald Trump’s tariffs to consumers for certain goods. Furniture prices jumped 0.7% in January from the previous month and are up 4% from a year ago. Appliances rose 1.3% in January, though they are only slightly more expensive than a year earlier. Clothing prices increased by 0.3% in January from December and have risen 1.7% over the past year.

Some services prices also saw increases. Airline fares soared 6.5% in January, following a 3.8% jump in November, though they are up only 2.2% from a year earlier. Music streaming subscriptions increased by 4.5% in January and are 7.8% higher than a year ago. However, these increases were largely offset by price declines or much slower price growth in other areas.

“Inflation continues to decelerate and is not threatening to move back up, and that will enable more rate cuts by the Fed,” said Luke Tilley, chief economist at Wilmington Trust.

A study by the Federal Reserve Bank of New York found that U.S. companies and consumers are paying nearly 90% of the tariffs’ costs, echoing similar findings from other studies. Despite these costs, the increases have not been as broad-based as many economists had anticipated. Tilley suggested that higher tariffs have shifted some consumer spending away from other services, compelling companies to keep those prices lower.

“We don’t think consumers are in a place to take on price increases across the board, so you’re not seeing those price increases,” he said.

Hiring was particularly weak last year, leading to slower wage growth, and many Americans remain pessimistic about the economy. Companies have been reluctant to add jobs, reducing workers' leverage to demand raises.

Arin Schultz, chief growth officer at Naturepedic, shared his company's experience with tariffs. Trump postponed import duties on upholstered furniture until 2027, which Schultz welcomed as it would have significantly increased the cost of imported headboards. He also noted the decision to lower tariffs on imports from India to 18% from 50%, as Naturepedic sources cotton fabrics and bedding from India. This reduction could allow the company to lower some prices.

However, Naturepedic's costs have risen due to duties on imports from Vietnam and Malaysia for organic latex, which cannot be grown in the United States. The company manufactures its mattresses in Cleveland and employs about 200 workers.

“We’re paying more now for that,” Schultz said, adding that the company raised its prices about 7% last year as a result. “Tariffs are awful. We are less profitable now as a company because of tariffs.”

If inflation moves closer to the Federal Reserve’s target of 2%, it could allow the central bank to implement further cuts to its key short-term interest rate this year. High borrowing costs for mortgages and auto loans have also contributed to a perception that many large purchases remain out of reach for many Americans. Inflation had surged to 9.1% in 2022 as consumer spending increased and supply chains faced disruptions after the pandemic. It began to decline in 2023 but leveled off around 3% in mid-2024, remaining elevated last year.