In early 2026, the pace of inflation in the United States slowed more than anticipated, offering the Federal Reserve a measure of relief after years of inflation persistently exceeding its target.

The key details from the latest Consumer Price Index (CPI) report released Friday are as follows:

The headline CPI increased 2.4% in January compared to the same month a year earlier, down from the previous annual rate of 2.7%. The core CPI, which excludes the volatile food and energy categories, rose 2.5% year-over-year, a slight decrease from the prior reading of 2.6%.

This latest CPI report arrives amid ongoing market uncertainty regarding the inflationary impact of tariffs implemented by the Trump administration. Tariffs introduced last year have already begun to elevate prices for certain consumer goods.

While the economic impact of these tariffs has been less severe than initially feared, it remains unclear if their full effect has been felt. This ambiguity makes it challenging for economists and policymakers to gauge how much further inflation might rise and when a sustained decline might begin.

The inflation figures from the Bureau of Labor Statistics came in below economists' forecasts, somewhat easing concerns about a resurgence of price pressures. However, the persistently elevated core inflation reading indicates that some price pressures remain sticky, suggesting policymakers will likely remain cautious about cutting interest rates too quickly.

The pace of disinflation is critically important for the White House, which is attempting to alleviate widespread public concern over high living costs ahead of the midterm elections this year.

Data released Wednesday showed the US economy added 130,000 nonfarm payrolls in January, significantly exceeding expectations, while the unemployment rate edged down to 4.3%. However, annual revisions substantially lowered previous estimates, revealing that only 181,000 jobs were added throughout 2025, far below the earlier projection of 584,000 and marking the slowest pace of job growth since 2010, excluding the pandemic year of 2020.

Public confidence in the economy has declined sharply. A consumer confidence indicator fell to its lowest level since 2014 last month, with respondents citing concerns over tariffs and high prices for essentials like food.

Economists had anticipated both the headline and core CPI to increase 0.3% month-over-month. The actual results were:

Headline CPI increased 0.2% from the previous month. Core CPI increased 0.3% from the previous month.

The moderation in January was driven by a decline in energy prices of 1.5%, along with lower prices for used cars, trucks, and vehicle insurance. These decreases offset increases in other categories:

Airline fares surged 6.5% month-over-month. Personal care services rose 1.2%. Recreation services increased 0.5%. Internet services rose 1.8% for the month and were up 3.5% year-over-year.

Shelter costs, which account for more than a third of the overall CPI index, rose just 0.2% for the month and were up 3.3% compared to a year ago.

Research from the New York Fed indicated that US businesses and consumers bore nearly 90% of the costs associated with the broad tariffs imposed in 2025. The average US import tariff rate jumped from 2.6% to 13% last year before exemptions were granted for some products. For much of the past year, businesses absorbed these costs or used existing inventories to avoid price hikes. Now, with inventories largely depleted, companies are beginning to pass these costs on to consumers, leading to price increases for tariff-sensitive goods like furniture, appliances, and apparel.

Most Federal Reserve officials anticipate the inflationary impact of tariffs will peak within the next three months before gradually subsiding, potentially helping to lower inflation in the second half of the year. Prices for household furnishings rose 0.3% in January and were up 3.8% annually, while apparel prices increased 0.3% for the month.

January inflation data is typically higher than in other months due to factors such as concentrated price adjustments at the start of the year and customary price increases in sectors like healthcare, logistics, and subscription services. While this seasonal pattern does not invalidate the January report, it encourages Fed officials to await more data to clearly discern the underlying inflation trend.

The Fed is expected to hold interest rates steady at its mid-March policy meeting, continuing the pause on rate cuts that began last month. Officials have indicated that after cutting rates by 25 basis points three times between September and December 2025, the current target range of 3.5% to 3.75% allows them to assess economic developments before acting further.

Most officials still believe there is room for rate cuts this year and are evaluating the level of the "neutral" interest rate. Future rate cuts are expected to be contingent on one of two primary scenarios: a significant weakening of the labor market, marked by a sharp rise in unemployment, or a steady decline of inflation toward the Fed's 2% target, as measured by the Personal Consumption Expenditures (PCE) price index. The PCE index has not met the target for five consecutive years, with the latest reading at 2.8% for November.

The Fed faces a delicate balance, wanting to avoid sending the wrong signals about its commitment to the 2% target while also ensuring it does not act too slowly and risk harming the labor market. This balancing act makes it likely that any rate cuts will be delayed until the summer.

Jerome Powell is set to step down as Fed Chair in May. His nominated successor, Kevin Warsh, a former Fed governor, has expressed support for further rate cuts, arguing that tariffs are not a primary driver of inflation and that high growth coupled with AI-driven productivity gains may not necessarily fuel price pressures.

Some analysts project that inflation will slow in the second half of 2026, potentially creating conditions for the Fed to implement two rate cuts within the year.