President Donald Trump’s economic policies appear to be paying off as inflation cooled more than expected in January, offering a measure of relief for consumers and strengthening expectations that interest rate cuts could be ahead.
The consumer price index rose 2.4% from a year earlier, the Bureau of Labor Statistics reported Friday. That was down 0.3 percentage points from December and marked the lowest annual reading since May 2025, CNBCÂ reported.
Core CPI, which excludes food and energy, increased 2.5% year over year. Economists surveyed by Dow Jones had projected a 2.5% annual gain for both headline and core inflation. On a monthly basis, the all-items index rose seasonally adjusted 0.2%.
Core prices climbed 0.3% for the month. Forecasters had expected 0.3% increases for both measures.
Financial markets reacted quickly. Treasury yields fell, and traders increased bets that the Federal Reserve could begin cutting rates as soon as June.
According to the CME Group FedWatch tool, the odds of a June rate reduction rose to roughly 83%.
“This is great news on inflation,” Heather Long, chief economist at Navy Federal Credit Union, said.
“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,” she added.
Shelter costs, which make up more than one-third of the CPI basket, rose 0.2% in January, while the annual increase in shelter slowed to 3%.
Housing remains a significant contributor to overall inflation, but the pace has moderated, reports said.
Food prices rose 0.2% for the month, with gains in five of the six major grocery categories, though energy prices fell 1.5%. New vehicle prices increased 0.1%, while used cars and trucks dropped 1.8%.
The latest report follows months of warnings that President Donald Trump’s tariff policies would reignite broad-based inflation.
So far, the impact has appeared more limited.
“The tariffs have had a clear impact on products such as furniture and appliances, but the key items in many family budgets are cooling off,” Long said.
The annual inflation rate now matches levels seen shortly after Trump rolled out aggressive tariffs on U.S. imports in April 2025.
The broader economic picture remains mixed.
The Atlanta Federal Reserve GDPNow tracker estimates fourth-quarter growth at 3.7%.
That suggests the economy ended 2025 on a solid footing.
Inflation remains above the Federal Reserve’s 2% target.
Job growth has been sluggish.
Employers added an average of 15,000 jobs per month last year.
Consumer spending held steady through much of 2025 but flattened heading into the holiday season.
Federal Reserve officials are widely expected to hold rates steady for now after cutting three times in the latter half of 2025.
The central bank is also facing leadership changes this year, including chair-designate Kevin Warsh, who is expected to favor lower rates.
Treasury Secretary Scott Bessent struck an optimistic tone this week.
He told CNBC he sees an “investment boom” helping drive growth as inflation returns to target “in the middle of this year.”
“We’ve got to get away from this idea that growth automatically has to be tempered down, because growth, per se, is not inflationary,” Bessent said.
“It’s growth that leaks into areas where there’s not sufficient supply, and everything this administration is doing is creating more supply.”
The January CPI report was delayed several days because of the partial government shutdown.
While markets closely watch CPI, the Federal Reserve relies more heavily on the Commerce Department’s personal consumption expenditures price index.
The next PCE reading, covering December data, is scheduled for release Feb. 20.
For now, January’s report offers some relief for households after years of elevated prices and strengthens expectations that rate cuts could follow later this year.