Inflation cooled more than expected in January, the Bureau of Labor Statistics (BLS) reported on Friday. The Consumer Price Index (CPI) rose 0.2 percent last month, down from 0.3 percent in December. On a year-over-year basis, headline inflation fell from 2.7 percent in December 2025 to 2.4 percent in January 2026 — the lowest reading since May 2025.
Core inflation, which excludes volatile food and energy prices, rose 0.3 percent in January, up from 0.2 percent in December. It eased to 2.5 percent on a year-over-year basis, down from 2.6 percent in the prior month. The January reading marks the slowest annual pace for core CPI since March 2021.
The latest inflation data are especially encouraging when viewed against historical patterns. Research from the Federal Reserve Bank of Boston shows that January inflation has consistently run higher than other months over the past quarter-century, owing to residual seasonality, the tendency for firms to change prices at the start of the year, and compositional effects in sectors that typically adjust prices in January. That January 2026 came in at just 0.2 percent (below the historical January average), suggesting that underlying inflation pressures are genuinely moderating.
The moderation in headline inflation was driven primarily by energy prices, which fell 1.5 percent in January. Gasoline prices declined, and utility costs moderated. Food prices rose a modest 0.2 percent, with food at home and food away from home both posting smaller increases than in recent months.
Shelter costs, which account for roughly one-third of the index, rose 0.2 percent — a notable deceleration from the 0.4 percent increase in December. The slower pace of shelter inflation is welcome news, as this category has been one of the most persistent sources of upward pressure on prices over the past several years.
Other components of the index showed mixed results. Airline fares surged 6.5 percent in January, continuing their volatile pattern. Appliance prices also surged in January, rising 4.4 percent. Apparel prices rose, while used vehicle prices fell 1.8 percent. Medical care services increased 0.4 percent.
While the year-over-year figures show continued disinflation, the recent three-month trend tells a more nuanced story. Inflation averaged 0.2 percent per month in November (0.2 percent, estimated), December (0.3 percent), and January (0.2 percent) — equivalent to a roughly 2.9 percent annual rate. Core prices averaged 0.2 percent monthly over the same period, also equivalent to a 2.9 percent annual rate. Both measures suggest inflation continues to exceed the Fed’s two-percent target.
Although the Federal Reserve officially targets the personal consumption expenditures price index (PCEPI), CPI data remain a timely and relevant gauge for policymakers. The two measures generally track one another closely, though CPI tends to run somewhat higher than PCE inflation. Historically, the gap between year-over-year core CPI and core PCE has averaged around 0.3 to 0.4 percentage points, meaning that January’s 2.5 percent core CPI reading likely translates to core PCE inflation in the range of 2.1 to 2.2 percent — very close to the Fed’s two-percent target. That makes the latest CPI readings particularly encouraging for policymakers as they assess the stance of policy. That said, current expectations of PCE inflation are higher than CPI inflation, potentially because measurement disruptions related to last fall’s government shutdown may have temporarily biased CPI readings downward.
Financial markets seem to have interpreted the latest inflation data as a sign that the FOMC will continue cutting its federal funds rate target later this year. According to the CME Group’s FedWatch tool, markets continue to expect the Fed to hold rates steady at its March meeting. However, the probability of a rate cut by June rose sharply to approximately 83 percent following the release — a dramatic reversal from earlier in the week, when a strong jobs report had pushed odds of a June cut below 50 percent. The shift reflects renewed confidence that inflation is moving closer to target even as the labor market remains resilient.
The January CPI report offers encouraging signs that inflation is approaching the Fed’s two-percent target. The sharp decline in energy prices and the deceleration in shelter costs are particularly welcome developments. While some uncertainty remains — particularly given methodological adjustments made to account for missing October 2025 data — the trend is moving in the right direction. Whether policymakers view current rates as neutral or mildly restrictive, the improving inflation picture provides room for the Fed to continue its gradual normalization process later this year without risking a resurgence in price pressures.
