Inflation accelerated in January, rising 3% on an annual basis, indicating that the Federal Reserve’s push to drive inflation down to a 2% annual rate has stalled out, at least temporarily.
By the numbers
The Consumer Price Index was forecast to rise 2.9% last month, according to economists polled by financial-data firm FactSet. The CPI, a basket of goods and services typically bought by consumers, tracks the change in those prices over time.Â
On a monthly basis, the CPI rose 0.5%, versus economists’ forecast for a 0.3% increase, according to FactSet. That’s the biggest monthly jump since August 2023. It may be due to price increases set at the start of the year by many businesses, noted Bright MLS chief economist Lisa Sturtevant in an email.
The report, which marks the fourth consecutive month of higher inflation, showed that the following items saw price increases on a month-over-month basis.
- Eggs: 15.2%
- Fuel oil: 6.2%
- Used cars and trucks: 2.2%
- Auto insurance: 2%Â
What economists say
Recent sticky inflation data backs the Federal Reserve’s decision last month to hit the brakes on additional rate cuts, economists say. On Feb. 11, Fed Chair Jerome Powell told the Senate Banking Committee that the central bank does “not need to be in a hurry” to pare rates further.Â
“This is not a good number,” Brian Coulton, chief economist at Fitch Ratings, said in an email of January’s CPI data. “This is almost starting to look like a re-run of the first half of 2024, when inflation surprised everyone (including the Fed) on the upside.”
He added, “And it illustrates how the Fed has not completed the job of getting inflation back down just as new inflation risks – from tariff hikes and a squeeze on labor supply growth – start to emerge.”
The new data shows that inflation picked up speed at the start of the President Trump’s second administration, which has signaled its intention to enact broad-based tariffs, including newly announced 25% tariffs on all steel and aluminum imports.Â
Because tariffs are essentially taxes on imports that are largely passed through to U.S. consumers, Mr. Trump’s import duties, if enacted, could push inflation higher in 2025, economists are forecasting.
What it means for your money
Higher borrowing costs for longer: With the Fed pausing on additional rate cuts, consumers are likely to pay more for loans and other debt, ranging from credit cards to auto loans.
“Today’s stronger than expected CPI release is likely to further cement the [Federal Reserve’s] cautious approach to easing,” said Whitney Watson, global co-head and co-chief investment officer of fixed income and liquidity solutions within Goldman Sachs Asset Management, in an email. “We think the Fed is likely to remain in ‘wait and see mode’ for the time being and anticipate the Fed staying on hold at next month’s meeting.”
Mortgage rates also aren’t likely to see relief anytime soon. Despite Fed cuts in 2024, mortgage rates remain near 7%, or close to a 20-year high. Mortgage rates haven’t followed the arc of the Fed’s rate cuts because they’re based on economic data as well as the 10-year Treasury yield.
“Progress on mortgage rates is only expected to occur when inflation is contained,” noted National Association of Realtors chief economist Lawrence Yun in an email.