Inflation increased in January, rising 3% on an annual basis, indicating that the Federal Reserve’s efforts to reduce inflation to a 2% annual rate have stalled, at least temporarily.
By the numbers
Economists polled by financial data firm FactSet expected the Consumer Price Index to rise 2.9% last month. The CPI, a basket of goods and services commonly purchased by consumers, tracks changes in those prices over time.
According to FactSet, the CPI rose 0.5% month on month, compared to economists’ expectations of a 0.3% increase. That’s the largest monthly increase since August 2023. It could be due to price increases set by many businesses at the beginning of the year, Bright MLS chief economist Lisa Sturtevant said in an email.
The report, which marks the fourth consecutive month of higher inflation, found that the following items saw price increases month over month.
- Eggs: 15.2%
- Fuel oil: 6.2%
- Used cars and trucks: 2.2%
- Auto insurance: 2%
What economists say
Recent sticky inflation data supports the Federal Reserve’s decision last month to halt further rate cuts, economists say. Fed Chair Jerome Powell told the Senate Banking Committee on February 11 that the central bank does “not need to be in a hurry” to lower interest rates further.
“This is not a good number,” Brian Coulton, chief economist at Fitch Ratings, wrote in an email about January’s CPI data. “This is almost starting to look like a re-run of the first half of 2024, when inflation surprised everyone (including the Fed) on the upside.”
He continued: “And it illustrates how the Fed has not completed the job of getting inflation back down just as new inflation risks – from tariff hikes and a squeeze on labor supply growth – start to emerge.”
The new data show that inflation increased at the start of President Trump’s second administration, which has signaled its intention to impose broad-based tariffs, including the recently announced 25% tariff on all steel and aluminum imports.
Tariffs are essentially taxes on imports that are largely passed on to US consumers, so if enacted, Mr. Trump’s import duties could raise inflation in 2025, economists predict.
What it means for your money
Higher borrowing costs for a longer period of time: With the Fed holding off on further rate cuts, consumers can expect to pay more for loans and other debt, ranging from credit cards to auto loans.
“Today’s stronger-than-expected CPI release is likely to further cement the [Federal Reserve’s] cautious approach to easing,” wrote Whitney Watson, global co-head and co-chief investment officer of fixed income and liquidity solutions at Goldman Sachs Asset Management, in an email.
“We think the Fed is likely to remain in ‘wait and see mode’ for the time being and anticipate the Fed staying on hold at next month’s meeting.”
Mortgage rates are also unlikely to drop anytime soon. Despite Fed cuts in 2024, mortgage rates remain near 7%, which is close to a 20-year peak. Mortgage rates haven’t followed the Fed’s rate cuts because they are based on both economic data and the 10-year Treasury yield.
“Progress on mortgage rates is only expected to occur when inflation is contained,” wrote National Association of Realtors chief economist Lawrence Yun in an email.
