U.S. inflation picked up pace in January as grocery, gasoline, and rent prices rose, a setback for families and businesses already dealing with higher costs. This increase in inflation is likely to strengthen the Federal Reserve’s stance on delaying further interest rate cuts.
The consumer price index (CPI) rose 3% in January compared to a year earlier, according to the Labor Department’s report on Wednesday, up from 2.9% in December. This marks a rise from the 3.5-year low of 2.4% seen in September.
The new data reveals that inflation has remained stubbornly above the Fed’s 2% target for roughly six months, after steadily decreasing for a year and a half. This persistent inflation has become a significant political issue, particularly for former President Joe Biden. President Donald Trump, if elected, promised to reduce prices immediately, though many economists are concerned that his proposed tariffs could temporarily raise costs.
The unexpected rise in inflation could dampen business optimism, which had grown following Trump’s election promises to reduce regulations and taxes. On Wednesday, the Dow dropped 400 points in mid-day trading, and bond yields increased, signaling that traders expect inflation and interest rates to remain high.
“We’re really not making progress on inflation right now,” said Sarah House, senior economist at Wells Fargo. “This just extends the Fed’s hold.”
Inflation typically rises in January as companies adjust their prices at the start of the year, although the government’s seasonal adjustments aim to account for these effects.
However, House pointed out that this inflation uptick was not just a temporary issue. Consumers, especially wealthier ones, continue to spend at a strong pace, giving companies little incentive to lower prices. Additionally, many of the factors that helped lower inflation in 2023, such as improvements in supply chains, have mostly played out.
Excluding the volatile food and energy sectors, core consumer prices rose 3.3% in January from a year ago, up from 3.2% in December. Core prices are closely watched by economists as they offer a clearer picture of future inflation trends.
Inflation also increased on a monthly basis, with prices climbing 0.5% in January from December, marking the largest increase since August 2023. Core prices rose 0.4% in January, the biggest monthly jump since March 2024.
Grocery prices saw a significant jump, rising 0.5% in January, driven by a 15.2% surge in egg prices. This is the largest monthly increase since June 2015, and egg prices are up 53% compared to a year ago. An avian flu epidemic forced egg producers to cull millions of birds, leading to shortages and price hikes.
The cost of car insurance also rose by 2% from December to January, while hotel prices increased by 1.4%, and the price of gasoline rose 1.8%.
The impact of tariffs, particularly those on steel and aluminum, is being felt by businesses like Abt, a consumer electronics store in Glenview, Illinois. Phil Hannon, the store’s vice president of operations, expects to raise prices by 3% to 15% starting in March to offset the tariffs’ impact. Hannon has been receiving notices from vendors about upcoming price hikes, although the specifics remain unclear.
Federal Reserve Chair Jerome Powell addressed inflation concerns during testimony before the House Financial Services Committee last Wednesday. Powell noted that while progress has been made on reducing inflation, the Fed is not yet where it needs to be. “Today’s inflation print … says the same thing,” he said, emphasizing that the Fed plans to keep rates “restrictive for now.”
In response to inflation’s decline from its peak of 9.1% in June 2022, the Fed cut its key rate to 4.3% during its final meetings of 2023. However, it raised rates earlier in 2022 and 2023 to a two-decade high of 5.3% to combat inflation.
The Fed’s interest rates influence borrowing costs across the economy, including mortgages and credit cards. Despite calls for rate cuts, including from Trump, the recent uptick in inflation makes it less likely the Fed will reduce rates soon.
Economists are also concerned about the impact of tariffs on goods prices, particularly cars, appliances, and industrial machinery. Trump’s 25% tariffs on steel and aluminum could increase costs for these items. Additionally, Trump has suggested imposing “reciprocal tariffs” on countries with high duties on U.S. goods.
“There’s just a stew of uncertainty that, if it lasts and lingers, could reduce business confidence,” said Anthony Saglimbene, chief market strategist at Ameriprise. This, he noted, could lead to reduced hiring and investment.
Powell acknowledged that higher tariffs could push inflation up, potentially limiting the Fed’s ability to cut rates. However, he emphasized that the actual impact would depend on how many imports are affected.
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