US inflation eases more than expected to 2.4%; Fed seen staying on hold

US consumer price inflation eased more than expected in January, offering markets some relief, but signs of firm underlying price pressures, along with a strong jobs report has reinforced the view that interest rates are likely to stay unchanged for now.

Data from the Labor Department showed consumer prices rose 2.4% in the 12 months through January, slower than economists’ expectations of 2.5% and down from 2.7% in December.

On a monthly basis, prices increased 0.2%, also below forecasts of a 0.3% rise.

The report was closely watched by investors assessing the likely path of interest rate cuts from the Federal Reserve, after a run of data pointing to resilient economic growth.

“This is great news on inflation,” said Heather Long, chief economist at Navy Federal Credit Union.

“Inflation fell to the lowest level since May, and key items such as food, gas, and rent are cooling off. This will provide much-needed relief for middle-class and moderate-income families.”

Core inflation holds steady

When volatile food and energy components were stripped out, core consumer prices rose 0.3% on the month and 2.5% year over year, in line with expectations.

Economists said the figures suggest inflation is cooling only gradually, with businesses continuing to push through price increases at the start of the year.

Core inflation readings have tended to overshoot forecasts every January, a pattern analysts attribute to seasonal adjustment models that may not fully capture one-off, turn-of-the-year price hikes.

January’s increase was also linked to the pass-through from broad import tariffs imposed by President Donald Trump, as well as the fading impact of higher readings from early last year dropping out of the annual calculation.

Markets react, Fed stays cautious

US stock index futures pared earlier losses after the softer headline inflation print, with investors maintaining expectations that the central bank will cut rates later this year.

The Fed currently holds its benchmark overnight interest rate in the 3.50%–3.75% range.

While inflation has cooled sharply since peaking above 9% in mid-2022, both the consumer price index and the Fed’s preferred Personal Consumption Expenditures measure remain above the 2% target.

Recent labour market data has complicated the picture.

Job growth accelerated in January and the unemployment rate edged down to 4.3%, underscoring the economy’s resilience and giving policymakers room to be patient.

Fed faces a delicate balancing act

The latest data arrive as the Fed faces a delicate balancing act in the final months of Chair Jerome Powell’s eight-year tenure.

As the Federal Reserve prepares for its mid-March meeting, officials are expected to receive just one more Consumer Price Index (CPI) report to help guide their decision.

Policymakers are seeking to curb inflation without derailing the labour market, a task made harder by lingering price pressures and shifting global conditions.

Economists expect inflation to pick up temporarily later this year, citing the delayed impact of import duties and the depreciation of the dollar against major trading partners’ currencies.

The trade-weighted US dollar fell about 7.4% last year, adding to imported inflation risks.

Strategists at Morgan Stanley said that historically, periods of strong U.S. growth combined with easing inflation have triggered sharp dollar declines, a backdrop that typically supports risk-sensitive assets.

Political stakes remain high

Despite the improvement in inflation, high prices continue to weigh on households.

Consumer surveys consistently show affordability among top concerns, reflecting the cumulative impact of years of elevated price increases.

Inflation has also become a potent political issue.

Voter frustration over rising costs during President Joe Biden’s term helped shape the backdrop to Trump’s return to the White House, and affordability is expected to feature prominently in congressional races later this year.