Key Points

  • The U.S. Bureau of Labor Statistics (BLS) reported Friday that inflation rose 2.4% year-over-year in January, below the expected 2.7% and down from 2.7% in December. Surveys show that high prices and affordability concerns remain major sources of consumer worry in 2026.
  • Excluding volatile food and energy prices, core inflation rose 2.5% year-over-year, down from 2.6% in December. BLS data show that energy prices fell 1.5% in January, while housing prices rose 0.2%, with housing contributing more to inflation than all other categories combined.
  • Jason Furman, a professor of economics at Harvard University, said on X: "The bottom line is: this is reassuring and consistent with my view that underlying inflation is around 2.5% with downward pressure." He added, "We got good employment data earlier this week," referring to last month's unemployment rate falling 0.1 percentage point to 4.3%. "So the Fed can wait and watch without rushing to act."

Deeper Analysis

Interest rate futures traders reacted to the lower-than-expected inflation data, anticipating that the Federal Reserve will ease monetary policy faster in 2026 than expected as of Thursday.

According to the CME Group's FedWatch tool, futures traders now see a 31% probability that policymakers will cut rates by 25 basis points twice before July 29, up from 27% on Thursday. They lowered the probability of keeping the main interest rate in the current range of 3.5% to 3.75% on July 29 from 22% to 18%.

Despite the favorable price data, economists at Bank of America Securities believe that "under Chairman Jerome Powell, the Fed is unlikely to cut rates unless labor market data deteriorates sharply and rapidly." Powell's term as Fed chairman ends in May.

These economists said: "We still expect 25 basis point cuts in June and July, possibly under Warsh's leadership." They referred to Kevin Warsh, the former Fed governor nominated to succeed Powell.

Warsh and two Fed governors have called for accelerating the pace of monetary easing, even though inflation remains above the Fed's 2% target and recent surveys show high prices are clouding consumer sentiment.

Joanne Hsu, director of the University of Michigan's consumer survey, said in a report this month: "Concerns about the erosion of personal finances due to high prices and rising unemployment risk remain widespread."

Although household sentiment rose this month to its highest level since August 2025, Hsu noted: "From a historical perspective, overall sentiment levels remain very low."

Flat retail sales highlight consumer pessimism. The U.S. Census Bureau reported Tuesday that retail spending was unexpectedly flat in December. Store sales were nearly unchanged after rising 0.6% in November, with declines at furniture stores, clothing stores, and eight other retail categories.

Beyond inflation, job insecurity also threatens consumer sentiment. The BLS said on February 5 that job openings fell last month, with openings for all of 2025 down sharply by 966,000 to 6.5 million, the lowest level since September 2020.

The Fed cut its main interest rate three times in the final months of 2025, citing labor market weakness. Since late December, Powell and other Fed officials have said they see the labor market stabilizing, supporting their stance of pausing further rate cuts until they have a clearer picture of price and employment prospects.

The latest labor market data support the rationale for a wait-and-see approach. The BLS reported Wednesday that the unemployment rate fell to 4.3% last month, with employers adding 130,000 jobs, far exceeding expectations.